WEX Inc (WEX) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Wright Express Corporation's first-quarter 2006 financial results conference call. Today's call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. (OPERATOR INSTRUCTIONS). 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 Smith. We released our first-quarter financial results only a short while ago, so I'll begin with a brief summary of the results and key metrics. The press release is now posted in the Investor Relations section of our website at WrightExpress.com. Following the summary Mike will review the Company's operations for the first quarter, then Melissa will discuss the financial and we'll open the call for your questions.

Before we begin I'd like to remind you that we'll be discussing a non-GAAP metric, adjusted net income, during our call. Please see exhibit 1 included in today's press release for an explanation and reconciliation of adjusted net income to GAAP net income. A copy of the press release has also been submitted as an exhibit to an 8-K we filed with the SEC.

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 from those forward-looking statements as a result of various important factors including those discussed in today's press release and those factors in the Form 10-K filed by the Company on March 15, 2006 and our other filings with the SEC.

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 let's move on to the summary of our results and key metrics. Total revenue for the first quarter of 2006 increased 24% to $64.6 million from $52.2 million for the first quarter of 2005. Net income to common shareholders on a GAAP basis was $11.4 million or $0.28 per diluted share compared with a loss of $18.5 million or $0.46 per diluted share for Q1 last year.

The Company's adjusted net income for the first quarter of 2006 was $12.3 million or $0.30 per diluted share. This non-GAAP figure excludes an unrealized mark to market loss of $1.4 million on our derivative contracts before taxes. Adjusted net income for Q1 last year was $11.3 million or $0.28 per share.

Next I'll turn to the key metrics we look at in evaluating the Company's performance. The average number of vehicles serviced increased 10% from the first quarter last year to approximately 4.3 million. Total fuel transactions processed increased 11% from Q1 a year ago to 58.1 million. The average expenditure per payment processing transaction for Q1 increased to $48.63. This represents an increase of 25% from the same period last year.

Average retail fuel price for Q1 increased 22% to $2.41 per gallon compared with $1.97 for the same period last year. Total MasterCard purchase volume grew 5% year-over-year to $269.4 million. Excluding our contract with Jackson Hewitt which terminated last year, MasterCard spend was up 42%. Finally, we paid $6.5 million in principle on our financing debt balance this quarter. I'll now turn the call over to our CEO, Mike Dubyak.

Hello, everyone, and thanks for joining us this afternoon. The first quarter was a strong start to our second year as a public company. This was a quarter of hard work, sustained focus and steady execution. As a result we continue to generate double-digit growth in business volume in terms of both the number of transactions processed and vehicles serviced and we once again came within our guidance range for revenue and adjusted net income.

Growth in payment processing transactions continue to drive our business. For Q1 the number of payment processing transactions increased 16% year-over-year. Demand for fleet card solutions remained very strong. Our front end sales and marketing engine is performing well in translating demand into a pipeline of new business and converting these prospects into customers.

Our first-quarter customer acquisition and retention metrics were again excellent. The number of vehicles we serviced this quarter was 10% higher than in Q1 last year and our voluntary attrition rate across all fleet sizes was less than 3%. Fuel prices were 22% higher in Q1 on a year-over-year basis. The tremendous ramp we've seen lately in retail gasoline prices seems to be stimulating more and more questions about the potential impact on our business. These questions are asked either in terms of our hedging strategy, our ability to acquire new customers, or in terms of the effect of higher pump prices on fundamental demand for our services.

In answer to the first question, rising fuel prices will increase our revenue as we've shown in our SEC filings; every $0.10 increase in fuel prices will increase our revenue about $7 million for the year. However, because of our hedging program, there is little short-term impact to adjusted net income. We remain confident that regardless of fluctuation in fuel prices our hedging program will continue to support the visibility and predictability of our cash flow and future earnings.

In terms of acquiring new customers, based on past experience there is little correlation between fuel prices and new business. It's true that fuel is a major variable cost for fleet operators. It's also true that rising prices tend to highlight the importance of controlling fuel purchasing which leads to greater interest in fleet cards, but the actual savings are still significant at times when pump prices are lower. This is why for more than two decades, including numerous cycles of rising and falling prices; we've seen continuous growth in the number of vehicles we service.

With regard to the effect of higher fuel prices on our current customer base, again looking back over more than 20 years, we have not seen a correlation between the price of fuel and demand for our services. When you think about this it makes sense, because the businesses we serve still keep operating and fuel spend is not discretionary. If however higher fuel prices start slowing the overall economy and demand for our products begins to diminish, that's when our business could feel the effects. Even up to this point with gas at nearly $3 a gallon we have not seen any change from historical fueling patterns.

Rather than fuel prices, the most important long-term growth driver for us is the continual transition across the entire economy from cash to electronic commerce. As we've noted before, within the United States there are around 41 million commercial and government fleet vehicles and we estimate that only about one-third are currently purchasing their fuel on a fleet card offering like ours.

Of the two-thirds of the market not using a fleet card we believe more than half are still purchasing with cash. Many of these fleets are looking for noncash alternatives that offer greater security and control. But they may not be aware of fleet card products which is by far the best noncash option. These fleets represent an under penetrated organic growth potential in our business. Capturing this potential involves identifying fleets that are good prospects, making them aware of fleet cards and then acquiring them as customers. The question is what are the customer acquisition tools?

For us these tools include expanding our distributor channel, offering new products like our business card, further developing our co-brand and private-label channels, and generating leads ourselves through direct marketing. Once we've acquired a new fleet we need to ensure that they remain a satisfied customer. For this reason much of what we do here at Wright Express revolves around taking care on our core, that is responding to the evolving needs of our existing customer base by refining, enhancing and adding to the functionality and levels of service we offer.

In terms of the growth impact, let's look first at the large and medium fleet market. For the first quarter the number of vehicles we serviced in large and medium fleets was up 12% from Q1 last year. This growth is attributable to work being done by our direct sales force as well as our broad range of co-brand relationships which include the six largest vehicle leasing companies in the country.

Large fleets are a heavily contested segment, one where discounts to retain large customers are common in the marketplace. In the medium and large fleet markets we've been successful in offsetting some of the pricing compression by giving fleets superior customer service and by being responsive to their complex information needs. For qualified fleets we offer a unique approach to service with customized reporting and dedicated account managers focused on meeting their clients' unique business needs.

In addition our size, geographic spread, depth of experience and technical capabilities put us in a position to provide these fleets with a variety of highly customized services and information solutions. For example, we facilitate price risk management solutions for some customers. Through an alliance with a third party we offer bulk fuel inventory management programs. We also have a variety of software integration options available. Added to that is the security and control we provide through our proprietary closed network and online functionality. As a result, the superior level of service that we provide is the key reason why we generated double-digit growth this quarter in large fleet transaction volume.

In addition to large and medium fleets we're working deleverage these competitive differentiators in a related segment -- private carrier fleets with heavy trucks. Last year we expanded our sales force to capitalize on heavy truck opportunities and, as a result, the number of heavy trucks we serve was up 20% from the first quarter last year. We're optimistic about the prospects for future growth in this segment. To date our penetration in heavy trucks has focused on private carrier fleets. We're now looking at opportunities to offer enhanced functionality that will open up additional segments of the heavy truck market.

In terms of transaction volume, we still see the major opportunity in the small fleet market. Unlike large and medium fleets, small fleets are under penetrated. As I mentioned earlier, awareness of fleet card solutions is generally low and the characteristics of small fleets are very diverse. They range from professional firms that offer various kinds of field services to local contractors that give drivers petty cash to pay for fuel.

We've been successful in acquiring and retaining small fleets because we've developed front end sales and marketing capabilities that are effective in targeting this type of customer. At the same time, we've been effective in developing innovative products that meet the unique needs of small fleet operators. As a result the first quarter was another period of solid growth in the small fleet market.

Overall, new small fleet business to all of our channels grew 6% year-over-year. In the direct marketing channel that we control, however, our growth rate was 19%. Looking across the entire business small fleets generated a little more than 25% of our total growth in Q1. Our growth this quarter demonstrated that our balanced portfolio approach is working. Large-market, mid-market, small-market heavy truck -- we're offering quality services and gaining marketshare in every one of these segments.

Turning to our MasterCard business, the year-over-year comparison for Q1, 5% growth in total MasterCard spend reflects last year's termination of Jackson Hewitt. Although only marginally profitable, they were one of our largest revenue programs in this segment. Excluding Jackson Hewitt, MasterCard purchased volume grew 42% from the first quarter last year. MasterCard requires different products, market segmentation and front end strategies and we have competencies in each of these areas.

We're frequently asked questions about acquisitions. Our M&A strategy has not changed. It's our practice as a matter of course to be looking at the marketplace for potential alliances or acquisitions that can accelerate our growth and/or enhance our strategic position. Strategically we expect to focus on deals in contiguous markets that compliment our core competencies. That is opportunities that are fleet, payment processing or information solutions related and have the potential to drive growth.

In the meantime there is enormous potential remaining to be tapped in our core business. We have a strong sales pipeline going into the second quarter. The Company continues to fire on all cylinders, operationally and financially and we are looking forward to another strong year of results.

With that, I will turn the call over to Melissa.

Hello and good afternoon, everyone. We executed well on the operational side this quarter and the results are evident in our financial performance. We saw solid double-digit growth in the number of transactions processed and we are continuing to improve productivity as the business expands. Perhaps the most encouraging part of the quarter is that the net payment processing rate in our fleet segment which has been declining for the past year, rebounded in Q1. We posted a solid increase in adjusted net income and cash flow remains strong enabling us to continue paying down our financing debt.

Total revenues for Q1 increased 24% to $64.6 million from $52.2 million for the same quarter last year. The biggest factors behind this increase are the growth in the number of vehicles serviced which led to an increase in the total number of transactions processed as well as increases in fuel prices. With that as a background we'll look more closely at each of our segments.

Revenue in our fleet segment grew 29% over Q1 of last year. Our largest single revenue source, payment processing revenue in our fleet segment, grew 35% year-over-year to $44 million. This is mainly driven by a 16% increase in the number of payment processing transactions to $43.5 million from $37.4 million a year ago. As a reminder, approximately 75% of our total fuel transactions processed are payment processing transactions where we earn revenue base on the dollar value of the transaction.

The average expenditure per payment processing transaction was up 25% to $48.63 from $39.04 from Q1 last year. For the most part this reflected the 22% increase in the retail price of fuel from $1.97 per gallon in Q1 a year ago to $2.41 per gallon. The remainder of the increase in the expenditure per payment processing transaction was due to an increase in the number of gallons of fuel purchased per transaction, up from 19.8 gallons to 20.2 gallons or nearly 2%. We believe this reflects our growing penetration into the heavy truck market where the larger size of vehicles leads to more gallons per transaction. This is significant because for the most part the major incremental costs for a larger transaction are limited to the cost to fund the transaction and any credit losses.

Our transaction processing revenue represents contracts primarily with oil companies where we act as an outsource provider on a private-label basis. The only difference between these transactions and payment processing is that we do not own the resulting accounts receivable balance. We earn revenue on a per transaction basis rather than on a percentage based fee. Our total transaction processing revenue was essentially flat from Q1 of last year at $4.2 million. The number of transactions was down 3% from last year.

Similar to what we saw last quarter, this was due to conversions of portfolios to payment processing. Reflecting the change in the mix of contracts, the average rate earned per transaction was slightly higher. Our account servicing revenue increased 5% from Q1 last year. This reflects the 10% increase in vehicle service we referenced earlier. Finally, finance fees increased 63% from a year ago to $5.2 million. This relates primarily to the higher average past due balances resulting from the increase in payment processing transactions and fuel prices.

Turning to our MasterCard segment, the two major factors affecting our results -- we saw a significant increase in purchase volume which was offset by the termination of the Jackson Hewitt stored value program. Our MasterCard segment contributed $3.6 million in total revenue this year compared to $4.8 million last year. Payment processing revenue was $3.4 million, a 42% increase from $2.4 million for Q1 last year. This increase was directly attributable to the growth of our purchasing card products.

Total purchase volume on our MasterCard products was up 5% over last year. Excluding the Jackson Hewitt program, total purchase volume was up an impressive 42%. Other revenue in this segment was $200,000, down $2.2 million from $2.4 million in Q1 last year. This is entirely attributable to the Jackson Hewitt program. In Total the Jackson Hewitt program contributed $2.3 million in revenue in Q1 last year and $200,000 net income. For the full year the program contributed $3 million in revenue and approximately $100,000 in net income.

Turning to operating expenses. On a GAAP basis total operating expenses were $35.7 million compared with $36.9 million in Q1 last year. Included in this figure is a $4.4 million decrease in salaries expensed. This was mainly due to a $5.7 million one-time charge in the first quarter of last year associated with the conversion of Cendant restricted stock units and stock options to Wright Express stock.

Also affecting our operating results was the $1 million increase in credit loss, which I will touch on in a moment, and the $2.3 million in higher operating interest expense due to higher interest rates and debt levels. The average debt level grew due to the increases in the average fuel price as well as the number of payment processing transactions.

Total credit loss expense in the quarter was $3.9 million compared to $2.9 million last year. The majority of the increase is due to the increase in payment processing expenditures. Credit losses as a percentage of total payment processing expenditures in the fleet related business again declined on a year-over-year basis this quarter from 16.8 basis points in Q1 last year to 16.1 basis points. On an annual basis our credit losses were at an all-time low of 11 basis points in 2005. Excluding last year's outstanding results, our range over the last five years was 15 and 22 basis points. While we strive for the best results, there's always a degree of variability in predicting credit loss.

In terms of accounts receivable, we do not foresee a change. Our Accounts Receivables continue to be collected within 30 days on average. We're continuing to see solid gains in productivity as our business model scales. We processed 87,000 transactions for (indiscernible) this quarter compared with 83,000 in Q1 last year which represents a productivity improvement of nearly 5%.

Our effective tax rate on a GAAP basis was 35.9% in Q1. This compares to 38.9% for the first quarter of 2005. Our GAAP tax rate is affected by the unrealized loss on our derivative instruments so it may fluctuate from quarter to quarter. Our adjusted net income tax rate was 35.9% in Q1 compared with 38% last year. The drop in the tax rate is due to an excess review which resulted in a refined calculation of income and loss by state. We expect this rate to remain relatively consistent.

Turning to adjusted net income, for the first quarter adjusted net income increased 8% to $12.3 million or $0.30 per diluted share from $11.3 million or $0.28 per diluted share last year. This increase reflects the changes in operating expenses I mentioned earlier as well as rising interest rates and the fact that our financing debt was outstanding for only about one month last year.

Turning now to the balance sheet -- I will be brief here. There were no unexpected changes to our year-end financial position. I will point out, however, that we paid down $6.5 million in principal on our financing debt this quarter leaving a balance of approximately $216 million with an additional $7 million in letters of credit used to secure our derivative instruments.

We continue to pay LIBOR plus 150 basis points on the outstanding amount of both the term loan and the line of credit and 30 basis points on the unused portion of the line of credit during the quarter. However, these rates will go down in Q2 to 137.5 basis points over LIBOR on the line of credit and term loan and 25 basis points on the unused portion of the line of credit as we have delevered the business.

Before we move on to guidance, a quick comment on our fuel price related derivative instruments. We're continuing to purchase these instruments to manage the Company's fuel price related earnings exposure going forward. Ultimately we expect to continue locking in about 90% of our adjusted net income exposure every quarter on a rolling basis. To date we've locked in 90% of our fuel price exposure through the third quarter of 2007, 60% through Q4 of '07, and 30% through Q1 of 2008.

We expect to make another purchase during Q2 in accordance with our rolling strategy. The bottom end of the range we've locked in for 2007 is approximately $2.30 per gallon. This step-up in the floor price will have a significantly positive impact on our 2007 earnings per share versus 2006. 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 fluctuation and may not properly reflect operating results for that particular quarter.

During the first quarter of 2006 we recognized a realized loss of $6.1 million before taxes on our derivative instruments and an unrealized loss of $1.4 million. There was a gain of a little less than $0.01 per share between the additional revenue we recognized due to higher fuel prices compared to the realized loss on our derivative instruments. This was in line with our expectations. This gain results from the mismatch between changes in wholesale and retail fuel prices during the quarter. Although our hedging strategy is designed to minimize these mismatches it doesn't totally eliminate them.

I'll conclude the Company's prepared remarks with our updated guidance for the second quarter and 2006. As we noted last quarter, UPS did not renew their contract with us which is set to expire at the end of May and the guidance that follows takes this into account. Let me remind you that our forecasts for these are valid only as of today and are made on a non-GAAP basis which 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.

Our estimates are as follows -- for the second quarter of 2006 we expect to report revenues in the range of 71 to $76 million. this is based on an average retail fuel price of $2.80 per gallon. For the full year 2006 we expect to report revenues ranging from 280 to $290 million based on an average retail fuel price of $2.65 per gallon.

As for earnings, for Q2 of 2006 we expect to report net income before unrealized gain or loss on derivative instruments in the range of 13 to $14 million or earnings per diluted share of $0.32 to $0.35. For the full year 2006 we expect to report net income before unrealized gain or loss on derivative instruments in the range of 54 to $56 million, or earnings per diluted share of $1.32 to $1.38 on approximately 41 million shares outstanding.

With that we'll be happy to take your questions. Operator, you can proceed with Q&A now.

(OPERATOR INSTRUCTIONS). Abhi Gami, Banc of America.

How many fleet managers are already implementing your new portal technology and are any large customers implementing it?

When you say the portal technology, Abhi, I'm not sure, are you just talking online or the true portal that we're trying to put in place with some of our co-brand partners?

The new more integrated product you've released.

Yes, I think if you're relating that to the co-brand market -- right now we have one co-brand partner using the portal which really allows them to integrate our online capabilities for their fleets. We have others in the queue but only one right now using the product on our co-brand line of business.

Do you actually generate additional revenue for the integration of that or for the deployment of that or is that just a service enhancement?

No, it's just a service enhancement as part of the relationship with them.

Okay, great. A question on the charge off. It appears that your total charge-off or net charge-off experience in the quarter was only up a little bit from your fourth-quarter experience and your balance now in your reserve is pretty much back to your post Katrina levels if I look at the numbers correctly. Is there any reason you're being more conservative on your provision?

The methodology that we use is very consistent. We actually go through and look at where our charge-off experience has been for the last six months and we calculate the reserve based on that experience. It's entirely tied into the short-term results within the portfolio.

Okay. So just from a methodology standpoint, are you looking at just the charge-offs or are you looking at it net of prior period recoveries?

It's net of recoveries, that's true.

Okay. So the Total balance has increased; does that imply that there hasn't been any degradation in the quality of receivables that you're holding now? Are you expecting a higher level of charge-offs going forward?

Well, we have said that 2005 for us was an outstanding year. So the 11 basis points would be a low point of comparison. We haven't changed the methodologies that we use when we're approving credit and we're not seeing any dynamic changes within the portfolio itself. The first quarter is typically a higher point for us in our credit loss experience. And (multiple speakers)

I'm sorry, go ahead.

And it was lower in basis points than our 2005 result.

Right, great. One last question if you don't mind. What percentage of your total fuel volumes are diesel?

We haven't disclosed specifically the percentage that are diesel. We're continuing to increase within our portfolio the heavy truck penetration and so we're seeing more of that business. But it's still by far and large fuel related.

Can you ballpark it, was it less than 25%, less than 10%?

I would say less than 50%. Sorry.

Thanks, Melissa.

Abhi, let me just clarify your first question. I want to make sure you do understand that, for example, all of the private-labels have the ability to use our online program for their fleets to manage their programs. We have some of our co-brand partners that have that capability as well, but there are some co-brands that are basically doing a lot of the customer contact/customer relationship maintenance of their vehicles and drivers directly. So those are the ones that we're trying to get our portal integration integrated into, if you will. And so a lot of those partners have some sort of maybe online system today, we just think they can start to take advantage of the functionality of our online system that may have some other features in addition to their features.

Great, thanks a lot.

I hope that helps because it's only a segment of the co-brand that we're talking about this portal. All the private-labels today can take advantage of it, they can brand it so it looks like it's their online system, etc.

Excellent. Thank you.

Patrick Burton, Citigroup.

Thanks for taking the call. Mike, how sustainable do you think that rate of growth is in the small fleet market in terms of transaction growth? Thanks.

I think it's very sustainable. We continue to feel very bullish about our WEX capabilities on our direct market. And I alluded to the fact we keep building other opportunities like our distributor product; we're building a distributor product that allows distributors who really are servicing local fleets to be more aggressive in that marketplace and we're seeing nice growth rates in our distributor products today.

We know that that's where the under penetrated marketplace is, so it's a matter of how much can we do directly, but then how much can we build, if you will, through indirect channels to get to that space. And we're continuing to look for ways to build partnerships to get to that space.

Thank you.

Paul Bartolai, Credit Suisse.

Good afternoon. First question, just on the pricing. By our numbers it looks like the discount rate actually improved a bit sequentially. Can you give some more color on that? Is that just the lower fuel prices sequentially or are you seeing something else there?

There are a couple of things that are impacting that. It did go up -- if you look at the fleet rate it went to 2.04% on a net basis compared to 2% in the fourth quarter of last year. Certainly what happens to the price of gas does impact that percentage, but we also saw, as we anticipated, the maturing of the renewals with the strategic contracts that we had resigned at the point of the IPO that are coming to their anniversary date. So we're seeing that impact being annualized. And so the rest of the portfolio is just being affected by normal renewals as our fleets come up for contract renewal.

And what was the timing of those renewals during the quarter? Was that a half quarter benefit of the anniversary or is it more than that?

It was throughout the quarter and actually I think one moved into the very first part of the second quarter.

So we should be some continued benefit from that as well in Q2 then it looks like?

There should be a little bit, yes.

Okay. And then looking at the hedge that you guys put in place at the time of the IPO, with you guys hedging 90% of your expected volume, are you seeing a little bit of a pickup there just given that volumes have been stronger than expected?

The amount that we've hedged was very close to 90% of our actual volume so it's not really much of a difference between the actual experience and what we had projected.

Okay. And then last question. On the small fleet side of the market, you talk about the 19% growth on the direct side. Why is the growth a little bit slower through your partners? Is that just because you don't have control over selling through that channel?

Yes, it's primarily on the private-label side. Most of that portfolio is small fleet, so to move that just takes more sales and marketing and they really control what they will put behind their sales and marketing program. So it's hard for us to control that. We can control the WEX side of the business but not the private-label. So they're growing and sometimes we've said in the past they will grow because we take on new portfolios and that sometimes will step up the growth in the private-label.

All right, great. And if I can sneak in one more. Can you give us some update on what your plans are in terms of headcount for the salesforce -- on the direct side?

Yes, we continue to build that. We keep looking at coverage models. We also look with the new products we're bringing out we add people in the field that can mine the current accounts with new products. And we've added -- probably we started last year with two people, we probably have eight people doing that today. We've added to the heavy truck side over the last year; we've added to the MasterCard side. So again, we're kind of data driven based on coverage models if it's inside, outside or some of the new products?

Okay, great. Thanks. Good job on the quarter.

Tien-Tsin Huang, JPMorgan.

Just a question about the timing on the next round of hedges. Are we getting close there? And how do the contracts look today in terms of price relative to the last round of hedges?

We said we'll make a purchase within the quarter, and we're obviously monitoring that on a frequent basis. Rates now that we'd lock into, and this would be the last quarter of 2007 and going into 2008, would be above $2.60 per gallon.

Okay, above $2.60?

Yes.

Okay, and then -- congrats, by the way, on getting your tax rate down. Any chance for further improvement there potentially?

We're always going to be looking at ways to reduce our cost structure and the tax rate is one of them. So it's something that we'll continue to explore. It's not something that we're projecting at this point in time; we think that rate will remain relatively consistent. But I think it's the way that we're going to approach any cost in our business.

Okay. So as you sort of sketched out guidance for us, did your guidance reflect any change in the base business beyond the tax benefit?

When we look at that we look at things holistically. So we look at what we thought was happening within the base business as well as the tax rate and came up with the guidance number together.

Okay. Then should we assume in the second quarter any potential mismatch again between wholesale and retail?

We're not seeing a dynamic difference between wholesale and retail like we did in the third and fourth quarters of last year. We're not going to give guidance specifically on it, but we're not seeing anything really abnormal going on in the marketplace at this point in time.

Okay, great. Thanks. Nice job.

Greg Smith, Merrill Lynch.

I think we just sort of touched on this, but the higher guidance, I just wondered if you could sort of break out the constituents of that. How much was operational versus tax rate versus any benefit from higher fuel prices -- any more granularity you can give there?

I'd say that we're looking at all of those things combined to come up with a guidance number.

A third, a third, a third? Okay, fair enough. And then with rising interest rates, is there anything you're doing to mitigate a higher funding cost?

Well, we've locked in a swap on the financing interest expense, we did that a while ago so we have that in place. But on our operating debt we've been extending the life of the certificates of deposit that we're locking in on. We've done that the last several months and we're going to continue to do that so that we'll reduce the amount of volatility that we have related to interest rates.

Okay. And then it sounds like you're seeing some good stabilization among your large fleet clients with regards to pricing. But what about any signs of potential pressure from the fuel retailers on the discount rates? Any reason to be worried about those -- the rates over the next few quarters?

Well, all we can do is speak from what we know today, Greg. And I guess all I can say is -- we've said it before -- every year there are a few of those that go into negotiation. There's no more of those this year than there were last year or the previous year. So all we can do is speak for what we know today.

And we've seen those rates remain very consistent over time.

Okay, thank you.

Robert Dodd, Morgan Keegan.

On the credit loss side, could you give us an idea what the breakdown is between this segment of the market -- are looking at higher credit losses in the small fleet segment of that business? I would imagine so. And is there any dynamic we should be looking at for heavy trucks growing at 20% and small fleets only growing at 6% at the moment? Obviously the total rather than just your direct piece of business.

Because the portfolio is so diversified both amongst SIC codes and across the geography, we have no individual customer that's more than 2% of our revenue. As we add to the portfolio it's rare for you to see a dynamic shift in it. It would take quite a long time for that to happen. So while we're continuing to add to the mix both small fleet accounts -- we're adding to the mix large fleet accounts, we're adding to the mix, as you said, heavy trucks. We're not seeing really a drastic change in the credit quality of the portfolio.

Okay, thanks. And then just going back to the issue about pricing for either your large fleet customers and also the large fuel merchants. The pricing has been pretty stable, but have you seen any indications about either merchants or fleet customers asking for bigger rebates or even pushing for wider spreads and tiered pricing or anything like that?

On the merchant side, as we said, we don't see anything different today than we've seen in the past and we've held that pretty steady. On the fleet side we do say that as contracts with our major fleets come up for renewal or as we're trying to solicit and sign up new fleets there is pricing pressure in the marketplace. We know that, we see that, we deal with that and we try to offset that with the value we offer on the customer service side, the innovation side, but it's there and it's in our guidance.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Michael Weisberg, ING.

Just to understand, your projection for fuel pricing is $2.80 for the second quarter. And did you acknowledge, have you hedged out at the end of the quarter yet? Because normally you would be -- the current hedge you do at the end of the first quarter you'd be 60% hedged for the first quarter of '08 by now, is that right?

Right now we're hedged 90% through the third quarter of next year, 60% through the fourth quarter of 2007, and 30% through the first quarter of 2008.

Am I thinking this wrong or does that mean you would typically do a hedge between now and the end of the quarter to move you up a quarter, is that right?

You're absolutely correct.

Okay. But you haven't put that hedge in yet?

That's correct.

Okay. But if you did it would be -- if you did it tomorrow it would be at $2.60 -- $2.60'ish?

It would be approximately $2.60. The market moves every day obviously, but that would be about $2.60.

Now is that typical that you get $0.20 spread between current prices and what you could hedge for? I'm assuming you're projecting a $2.80 price for the quarter and your hedge prices is $2.60?

(multiple speakers) with the long-term market is (indiscernible) prices fuel to go.

I'm sorry, would you say that again?

I said it's based on what the long-term view of fuel prices is at the moment as opposed to the spot market now.

I see. So it's not necessarily an automatic discount to the current spot market?

Correct. Sometimes the forward curve is inverted, sometimes it's not. It depends on what's happening in the marketplace.

Great. And just to repeat, Melissa, the wholesale/retail spreads have benefited you buy a penny this quarter.

A little bit less than a penny, yes.

And it was versus $0.03 I think in the fourth quarter, is that right?

Yes.

Great. Thanks a lot. Great job.

Thank you.

Abhi Gami, Banc of America.

One more question. During your prepared commentary you said that you're now looking to offer enhanced functionality to open up the private carrier heavy trucks market. Can you talk a little bit about what some of that enhanced functionality will be?

I'll give you one example because we've actually launched the product. It just gives the customers cash advance capabilities. So if we are really talking about more of a regional fleet where a driver may be staying overnight or something, they now have the ability for those drivers to also access cash at the truck stops. So it just opens up some of the pieces of the market we couldn't offer services to before because they needed those sorts of services, that's the idea.

Excellent. Thank you.

At this time we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Mike Dubyak for any closing or additional remarks.

Thanks, everyone, for listening. During the first quarter we celebrated our first anniversary as a publicly traded company and I'd like to recognize and congratulate the associates of Wright Express for their commitment and dedication that equated to our strong results to date. We look forward to speaking with all of you again next quarter. This concludes our call. Have a good evening.

And that concludes our conference call. Thank you for joining us today.