WEX Inc (WEX) 2006 Q3 法說會逐字稿

Good day and welcome everyone to the Wright Express Corporation third-quarter 2006 financial results conference call. This call is being recorded. (Operator Instructions).

At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Steve Elder. 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. The press release we issued this afternoon is now posted in the Investor Relations section of our website at WrightExpress.com.

I would like to remind you that we will 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 would 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 included 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.

I would also like to note that as previously announced, we will be discussing a preliminary income statement and selected balance sheet items today. This is due to the ongoing review of our goodwill allocation. The allocation being reviewed goes back to the transaction in March 2001 when our former parent company, Cendant, purchased Avis Corporation. This was prior to our IPO when Wright Express and PHH were both units of Avis.

Resolving the issue involved sorting out goodwill allocations between Wright Express and the other two companies involved. We expect the reallocation of goodwill will require us to refile our 10-K for 2005 as well as interim reports on Form 10-Q for the first two quarters of 2006. We expect any restatements in these filings to be limited to increases in the goodwill and equity on our balance sheet for the periods since 2001. There will also be an adjustment to our income statement for 2001 related to goodwill amortization for 10 months of that year.

Subsequent income statements are not expected to be affected because amortization of goodwill ended with the adoption of FAS 142 in 2002. We do not expect to incur an impairment charge related to the additional goodwill allocated to us, and there will be no cash impact on reported results. We're making every effort to put this behind us as quickly as possible.

I will now turn the call over to our CFO, Melissa Smith.

Good afternoon everyone and thanks for joining us. Wright Express again performed well this quarter. Revenue was in line with our guidance, and adjusted net income exceeded the top end of our stated range.

I will start by recapping the numbers. Total revenue for the third quarter of 2006 increased 18% to $79.7 million from $67.4 million for the third quarter of 2005. Net income to common shareholders on a GAAP basis was $34.4 million or $0.83 per diluted share compared with a GAAP loss of $6.2 million or $0.15 per share for Q3 last year. Adjusted net income was $16 million or $0.39 per diluted share for Q3 this year, a 19% increase compared with $13.4 million or $0.33 per diluted share for Q3 a year ago.

While revenue was consistent with our expectations, Q3 adjusted net income was higher. There were a few large items that affected results this quarter. We had an uptick in our credit losses compared to last year.

Offsetting this credit loss however were two factors. First, there was a favorable change to our estimate of state income taxes for 2005 that we recognized as a benefit in our tax provision in Q3. And second, there was a larger positive mismatch on our derivatives than expected.

Although revenue was in line with our expectations, we knew that our operating metrics would have challenging comparisons with Q3 last year. But our business performed as we expected. Transactions volume came in exactly the level we forecasted. The net payment processing rate in our fleet segment remained stable for the third consecutive quarter. Adjusted net income continued to grow, and we continued to see strong cash flow.

We have good earnings visibility into 2007, given that we have hedged approximately 90% of our fuel price related earnings exposure for the upcoming year and we're at three-quarters hedged for 2008. The weighted average floor price we've locked in for 2007 is $2.33 a gallon compared with a top end of $1.95 this year. And prices we've locked in so far for 2008 are even higher than 2007. With that as a background, let's look at the results for the quarter.

Total revenues for Q3 increased 18% to $79.7 million from $67.4 million for the third quarter last year. Key drivers were 5% growth in the number of vehicles serviced and a resulting 2% increase in the total number of transactions processed as well as the increase in fuel prices.

You may recall we announced last quarter that we terminated approximately 67,000 non-revenue producing private-label vehicles in a clean-up of the portfolio. This affected vehicle growth this quarter, and we will discuss the factors affecting transaction growth in more detail in just a minute.

Total revenue in the fleet segment of our business grew 18% from Q3 of last year. Payment processing revenue in our fleet segment grew 17% year-over-year to $54.8 million. The number of payment processing transactions was up 6% to $46.8 million from $44.3 million a year ago.

Our transaction volume this quarter reflects a number of factors affecting the comparability between quarters. In Q3 of 2005, we saw unusually high transaction volume due to the post-hurricane recovery efforts. There were also more business days in the year earlier quarter.

Since then, two other significant factors occurred. Our contract with UPS terminated at the end of May 2006 and some of our private-label strategic relationships sold locations. We expect the effects of these two items to continue into the fourth quarter.

Without these four factors, third-quarter transaction volume would have grown between 7% and 9% from Q3 last year. The average expenditure for payment processing transactions for Q3 of 2006 was up 14% to $57.95 from $50.72 a year ago. For the most part, this reflected the 12% increase in the retail price of fuel from $2.57 per gallon in Q3 of 2005 to $2.87 this quarter. The remaining 2% increase was due to a larger transaction size as measured in gallon.

Our total transaction processing revenue was up 4% from Q3 of last year to $4.7 million. The number of transaction processing transactions was down 9% to $15 million, similar to what we've seen for the past two previous quarters. This is primarily due to conversions of portfolios to payment processing and as I just mentioned the sale of some sites within the private-label channel.

Reflecting the change in the mix of contracts, the average rate earned per transaction was slightly higher. Our account servicing revenue increased 4% from Q3 last year. This reflects the 5% increase in vehicles serviced.

Finally, finance fees increased 49% from a year ago to $6.2 million. This relates primarily to the higher average daily accounts receivable balances subject to late fees because of higher fuel prices and an increase in payment processing transactions.

This was another strong quarter for our MasterCard business with total purchase volume up 45% from Q3 last year. The MasterCard segment contributed $4.8 million in total revenue in Q3 compared to $4.1 million a year ago. MasterCard payment processing revenue rose 23% to $4.4 million from $3.6 million for Q3 last year. This growth was directly attributable to higher spend volume on our purchasing card product.

Turning to operating expenses. On a GAAP basis, total operating expenses were $40.6 million compared with $33.3 million in Q3 last year. The biggest factors were $2.8 million in higher operating interest expense, $1.8 million in salary and other personnel expenses and $2.7 million in increased credit losses.

Operating interest expense is higher than last year due to the same two factors we talked about in past quarters, higher interest rates and higher average debt levels. In order to mitigate the impact of rising interest rates, we have extended the average maturities of our CDs. We currently have approximately $125 million in CDs with an original maturity of more than one year. The average debt level grew due to the increases in average fuel prices as well as the number of payment processing transactions. There were no significant changes to our DSOs.

The increase in salaries expense mainly reflects the people we have added over the past year in our sales, IT and finance areas. About half of the increase was in our sales and marketing area. There was also an additional $450,000 in stock compensation expense for the new grants awarded this year.

Our total credit loss, including both fleet and MasterCard, was $5 million in the third quarter compared to $2.3 million last year. In the fleet-related business, credit loss as a percentage of total payment processing expenditures were 9.2 basis points a year ago compared with 12.5 basis points this quarter. This is still a relatively low loss rate compared to our historical range of 11 to 22 basis points over the last five years.

In our MasterCard segment, total credit loss expense in the quarter increased to $1.4 million from $250,000 last year. Although we see this happen occasionally, it is atypical. The last time we saw a significant increase in our loss rate in this portfolio was in 2003 due to an Enron write-off.

Included in total credit loss this quarter was a reserve of approximately $2.2 million related to one customer split roughly equally between fleet and MasterCard segments. Again, this is an unusual event that does occur from time to time. But our portfolio is so large and diversified that even a sizable loss like this has little impact, if any, on the overall health of the business.

As communicated to you during our first-quarter call, we reduced our 2006 effective tax rate based on our state nexus review. During the third quarter, our 2005 state tax filings resulted in a $1.3 million benefit in our tax provision. This resulted in a $0.03 pick-up to our adjusted net income and GAAP earnings.

Our effective tax rate on a GAAP basis was 35.8% in Q3 compared with 23.8% for the third quarter of 2005. Our GAAP tax rate is affected by the unrealized gain or loss on our derivative instruments, so it may fluctuate from quarter-to-quarter. Our adjusted net income tax rate was 35.2% without the $1.3 million benefit we received and 29.4% including the benefit compared with 38% a year ago.

Let me touch on a derivative program for a moment. We plan to continue our current program of purchasing derivative instruments quarterly to manage the Company's fuel price-related earnings exposure going forward. During the third quarter, we recognized a realized loss of $12.9 million before taxes on these instruments and unrealized gain of $31.1 million.

Due to the unusually high retail fuel margins experienced this quarter, we recognized approximately $0.04 of additional earnings per share for the difference between the additional revenue received and the cash settlement with our counterparty. This happens because our contracts are based on the wholesale price of gasoline, while the revenue we earn is based on the retail price. Knowing that retail margins are a bit larger than normal, some of this upside was built into our Q3 guidance.

We've structured our hedge program with an eye towards the best interest of our shareholders. When wholesale fuel prices are rising, retail prices tend to keep pace and our contracts are generally well matched. When wholesale prices fall, retail prices tend to fall at a slower rate. This lag creates the opportunity for us to increase earnings, which is why our program uses wholesale-based contracts.

Finally, the business continued to generate healthy cash flow this quarter. Our accounts receivable balance net of reserves for credit loss dropped to $839 million from $891 million at the end of Q2. We paid down $8 million in principle on our financing debt, bringing our leverage ratio to approximately 1.8 times. We currently have a balance of approximately $192 million in financing debt. We paid LIBOR plus 137.5 basis points on the outstanding amounts of both the term loan and the line of credit and 25 basis points on the unused portion of the line of credit during the quarter.

We are working closely with the Board in evaluating the available options for deploying our cash. We continue to seek opportunities for alliances, mergers or acquisitions that can accelerate our long-term growth and/or strategic -- and/or enhance our strategic position by leveraging our core competencies. Beyond that, we will consider other possible uses of our cash flow.

I will conclude with our financial guidance for the fourth quarter of 2006 and the full year. Let me remind you that our forecast for these periods 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.

The guidance includes a pre-tax gain of approximately $1.7 million or $0.03 per share for the sale of all of our Class B MasterCard shares we've received from their IPO as well as expenses related to our expected restatement. For the fourth quarter of 2006, we expect to report revenues in the range of $65 million to $70 million. This is based on an average retail fuel price of $2.28 per gallon. For the full year 2006, we expect to report revenues ranging from $285 million to $290 million based on an average retail fuel price of $2.61 per gallon.

As for earnings for Q4 of 2006, we expect to report net income excluding unrealized gain or loss on derivative instruments in the range of $14 million to $15 million or earnings per diluted share of $0.33 to $0.36. For the full year 2006, we expect to report net income excluding unrealized gain or loss on derivative instruments in the range of $56 million to $57 million or earnings per diluted share of $1.36 to $1.39 on approximately 41 million shares outstanding.

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

Thanks, Melissa, and good afternoon. I will start with some great news for Wright Express. Today, we extended our long-term strategic relationship with ExxonMobil for an additional 10 years. The ExxonMobil fleet business will be converted to Wright Express as the exclusive provider for the private-label fleet card business of one of the country's leading fuels marketing companies.

Acquiring portfolios this large is highly competitive, so there will be a greater impact on revenue versus earnings. At the end of December, we will purchase the existing balances and switch the ExxonMobil business from a transaction processing relationship to a payment processing relationship.

We will be providing a full range of outsourced private-label services, including marketing and customer acquisition, which will allow us to control the acquisition of new customers with our own inside and outside sales force dedicated to the ExxonMobil portfolio. We will generate leads for these salespeople by investing significant marketing dollars in the form of direct-mail, station promotions and other proven sales techniques used for the direct-marketing channel.

We believe there is significant potential to grow the ExxonMobil Fleet Card program beyond its current size. As we work to convert this major customer over the next couple months, we will incur additional expenses in Q4. These were included in the guidance Melissa gave earlier. Looking ahead, we believe that extending and expanding our relationship with ExxonMobil will be a significant opportunity for long-term growth.

Now, I would like to move on to what I believe are the key focus areas for investors right now, beginning with the transaction growth. As Melissa said, several factors affected comparisons to Q3 last year, some of which will continue into the next quarter.

So as we expected, growth in business volume was slower this quarter on a year-over-year basis. That being said, it was a solid quarter in terms of our underlying sales and marketing productivity. We are having a record year in our inside sales group, and we exceeded our third-quarter goals for our outside sales force as well as MasterCard purchase volume.

The second key focus area for investors is the decline in retail fuel prices, a reversal from three months ago when fuel prices were rising. As it turns out, we held our conference call last quarter within a few days of the highest retail fuel prices the country has ever seen. Despite the drop since then, our message is the same as it was last quarter. Our experience continues to demonstrate that short-term swings in fuel prices in and of themselves have little effect on our transaction volume. We have also heard some concerns from investors related to the rumors about a slowdown in the trucking sector and its implications for overall economic growth.

First, let's clarify that conditions in the freight transportation market are typically very different from conditions in the local fleet markets served by Wright Express. Our business model is driven by a wide range of commercial business activities taking place on a nationwide scale. Transporting manufactured goods is mainly a long-haul, heavy truck phenomenon that is interesting to us as a growth opportunity. But it is not yet significant in terms of transaction volume.

Looking ahead, we still have a very large market of commercial fleets not using products similar to ours. We continue to make good progress in penetrating this market. We have significant competitive advantages, such as the tremendous amount of actionable data we capture through our technology, our superior customer service and our proven sales and marketing platform.

About 70% of the vehicles in our target markets operate in small fleets, so this is where we see the greatest potential for growth in business volume. With our strengths and understanding the needs of small fleets and acquiring new customers in this market, we have driven a great deal of growth through a small fleet direct-marketing channel for the past few quarters.

For the third quarter, the number of small fleet vehicles serviced through the Wright Express Universal product posted a growth rate of 21% year-over-year. The private-label channel typically comprised of small fleets, where we don't directly control the sales and marketing, has proven to be more challenging.

Overall, the number of vehicles we serviced for Q3 was essentially flat with last year. However, as Melissa mentioned earlier, this is the segment where we terminated inactive vehicles last quarter and we expect this will happen again in future quarters. It is also the area most affected by the selling of station locations in our private-label channel.

Because of the slower growth we have seen in this area, developing products for the distributor market to increase penetration in the small fleet segment is one of our priorities for the next year. We are excited about our recent developments with Pacific Pride, which has one of the country's largest distributor networks. This relationship is based on a product we have developed specifically for Pacific Pride that will ultimately enable them to provide a full-featured card offering across their entire network.

A small number of Pacific Pride distributors are testing this product right now. As we roll it out across the country over the next year, we have the potential to add an impressive number of small fleets and vehicles to our transaction base. Looking farther ahead, variations on this product customized to meet the specific needs of other large distributors could substantially accelerate our small fleet business in this channel. What makes this product such a plus for us is that it represents a way to provide our small fleet servicing and credit expertise to distributors and drive growth through those relationships.

Turning to large and medium fleets, our growth in these segments comes primarily from the direct and co-branded marketing channels, not just because we can leverage our front-end strengths but because of the quality and functionality of our products and services. In these very competitive segments, we can take pride in the fact that our vehicle count was up 8% from last year with roughly equal amounts of growth coming from our direct and co-brand channels.

If you combined our capabilities on the front end with our technology platform and customer support competencies, you are looking at a truly world-class set of fleet card services. Our ability to deliver on all these levels can be leveraged to drive growth not only in our traditional fleet markets but in outsource servicing of very large fleet card portfolios as exemplified by the ExxonMobil portfolio win I just mentioned.

Another segment I would like to touch on is the heavy trucks -- still a relatively new market for us but one that shows real promise. For the third quarter, the number of heavy trucks we served was up 14% from a year ago.

As Melissa said, our MasterCard business performed well this quarter. Total purchase volume was up 45% year-over-year. We are winning new business away from competitors and finding unpenetrated opportunities. Some of these wins are quite large in scope.

As I mentioned last quarter, we have renewed the online travel services firm, Priceline.com, for an additional five years. In Q3, we expanded our MasterCard presence in online travel by re-signing Orbitz, also a global leader in this segment. The Orbitz agreement expanded on our current contract by adding their international business. This is a rapidly-growing company, and we are excited to deliver world-class services to them.

We are also doing well penetrating small and mid-sized customers with our MasterCard product. The purchasing card solutions we offer typically provide the same kinds of online tools and analytical capabilities that large issuers offer to major corporations. This helps our relatively small customers equal the playing field by tailoring their MasterCard program to their precise needs.

To sum up, we are optimistic about the fourth quarter and the year ahead. Our sales pipeline continues to look good. Our customer satisfaction metrics remain high. We are staying well ahead of the curve with our technology platform and our ability to deliver exceptional value to fleets of all sizes today and in the future. Most importantly, we continue to see solid demand for fleet and corporate card solutions.

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

(Operator Instructions). Pat Burton, Citigroup.

Congratulations on the quarter. My question has to do with the increase in the credit provision. What makes you so confident that you are not seeing the beginning of a new trend there perhaps in terms of rising delinquencies and rising charge-offs? And then I have a follow-up please.

We saw in the third quarter we had one specific reserve for a customer of $2.2 million. If you strip that out of our fleet credit loss experience, you would have calculated 8.5 roughly basis points of loss, which is below what our historical average has been for the last five years. So, you could say our portfolio overall is continuing to look healthy. We had an unusual event occur with one large account.

So you've seen no pickup in like leading indicators like delinquencies or anything like that -- late payments?

We have not seen any wholesale change in our portfolio, no.

Then my follow-up is actually for Mike. And that is, just your view of the landscape for merger and acquisition and what you think the appropriate leverage ratio is for the Company, given you have done a great job delevering here the number of quarters you've been public and thanks.

Thank you. I think overall, we've talked about what our target is for our leverage. We feel that we are starting to get within that range. And clearly acquisitions, we've talked about something that we would use our cash flow would be acquisitions as one of the alternatives. Clearly it's -- as we said, it could be strong alliances. It could be acquisitions that could help increase our growth, help on the information solutions side. So areas like that are contiguous markets.

So we continue to look. And if it makes sense, we will pursue some of those.

Paul Bartolai, Credit Suisse.

Congratulations on the Exxon win. It sounds like a nice deal for you guys. You mentioned the revenue versus the profit impact. I was hoping maybe you could just give us a little more color. I assume with the shift from transaction to payment, it will be incremental to profits but any more color you can give there will be helpful.

Yes, I guess all we can say to some extent, as you can imagine, this is a very large portfolio for a major company. It is highly competitive. So, I think it is going to be payment processing, which means we're going to be funding receivables which clearly will impact the revenue side. But it is a very competitive situation, so we're just not going to see the same impact on the bottom line.

And then just maybe in general on the pricing just within the normal parts of the business, any changes you're seeing there? I mean it looks like the discount rate held pretty steady again.

Yes, I think we have been consistent saying we clearly see competition. So that is not changing. But overall as we see the market playing out, those are all factored into our guidance and again within the range we have been forecasting in our guidance.

Just to give you more specifics on ExxonMobil or I should say just kind of in general, we are looking next year at we think about 21 million transactions what we're estimating that is going to move from an unfunded relationship to a funded relationship. And the impact of that, as Mike talked about, would reduce our overall payment processing rate probably between 5 and 10 basis points. Specific to ExxonMobil, you'll see an increase in bad debt in terms of dollars because we're now funding the relationship in operating interest expense. And it will have an impact to our pretax margins, reducing them if you had the same price of gas between 0.5% and 3%.

That's helpful. And the approximate timing on that is -- will you be fully converted by the beginning of '07 or is it going to take longer than that?

No, the plan is to be converted by the end of the year. So we will start the payment processing relationship January of next year.

Tien-Tsin Huang, JPMorgan.

Just a follow-up to Pat's question about the acquisition pipeline. Has that changed at all given some of the recent activity in the marketplace?

How do you mean has it changed at all?

I guess retail decisions was -- sounds like it's going to go to a private equity firm. I am curious to know if the overall pipeline of acquisitions that you have looked at has changed in the last quarter or so?

No, I think it is consistent with what I said earlier. And sometimes, we're not in control of what is available on the market. Sometimes, we look at our strategic plan and we have our priorities. I can't say that our priorities have changed. We will continue to look that makes sense for some of the criteria I gave earlier to help us in our growth areas, information solutions. International would be one of the growth opportunities. But again, it has to make sense internationally for some other factors.

Could it help us with some of the current partners we have? Could we leverage our technology base into other parts of the world? So there's other criteria we would look at.

Understood. Then, I guess, Melissa, the $0.04 in the spread gain, how much did you actually contemplate in your original guidance? And what should we expect again in the fourth quarter?

I don't think we gave a specific number included in our guidance. It was a partial amount of that $0.04. In the fourth quarter, we are seeing that spread at least continued into the first part of the fourth quarter but it has reduced since then. It's unable -- we're unable to actually project out specifically what those margins are going to be for the whole part of the fourth quarter but we've included something in our guidance.

So something is still positive there.

Yes.

Then lastly on MasterCard real quick, I guess that's still performing very well from a volume perspective. What does the pipeline look like there? And is the current rate of growth sustainable given what you see in the pipe?

Well, all I would say is we feel very good about the pipeline and what we're doing in the MasterCard space. We are fully ramped up on our sales reps and feel that at least for right now we're feeling very bullish about the future with MasterCard.

Congrats on ExxonMobil.

Abhi Gami, Banc of America.

How much will you be spending during the fourth quarter due to the ExxonMobil conversion? And will any of that expense continue into 2007?

We have some ramp-up costs that we've included in our forecast. We haven't been so specific as to give a number. But there are some costs associated with that and that will continue into 2007 but at less of a rate. But it will affect the first quarter of next year as well.

Without saying numbers, we will be trying to kick it off with a strong part of the year with some direct-mail that we will probably do potentially in the fourth quarter. We will be also hiring sales reps and some of that could happen in the fourth quarter. So there's a number of things that could be impacting the fourth quarter just depending on timing.

Great. You talked earlier about the new product offering you created for Pacific Pride. Can you describe that product and what you would think you can leverage to other distribution partners?

Yes, the distributor market, as you know, is one step down from the major and independent oil companies that we have typically done private-label relationships with. A lot of these distributors use the Pacific Pride program, which is basically just a transaction processing system. They do all of the other services themselves from marketing to credit to collections to customer service to funding and all of that.

What we're going to be doing with Pacific Pride is layering in a host of those services and let these distributors kind of pick from a menu of what they would like Wright Express to help participate in, if you will, either in servicing their accounts or helping to market their accounts. So, it's a host of services that have never been applied directly to them. They have done it in-house.

We just think from the early results of the pilots we're doing and the results from some of their franchisees that we think there is great opportunity as that program continues to roll out next year to see a number of those distributors start to use these different products and services that we can provide to them.

So, in essence, you are offering an a la carte sort of product to the prices to resell to those customers?

That's right. To layer on top of just their pure transaction processing basis program today.

I see. Okay, great. And finally, you mentioned earlier that you are staying ahead of the technology curve. Can you specifically speak to some of the things that you've done in that area and what we might be expecting over the next few quarters?

A number of things. I mean, we've introduced some new technologies with our new I-Spec, which as you know, is our point-of-sale spec that we've been deploying with the major oil companies. So it gives us some capabilities like getting more real-time information versus waiting for batch information to come to us. And with that real-time information, we have been already using that to help us in fraud detection, some other areas just to see unusual patterns that are happening with some of our customers and helped our customers out in a number of instances.

So we think that capability can be leveraged into some other product areas. So, it is more in that area of using this front-end technology that we've been deploying to really differentiate what we can do for our fleets at the front end, not just on the back end with our Web-based products.

Michael Weisberg, ING Investment Management.

The sense I get is that you had a onetime gain from the sale of the MasterCard-related business in the fourth quarter and it will be partly or wholly offset by the onetime costs relating to Exxon. Is that the right way of looking at it?

We have two things in the fourth quarter, the costs related to Exxon in the fourth quarter as well as the costs relating to the restatement.

Right.

Right. All those things are affecting the fourth quarter.

Got it. Was there a reason you had to take the credit card provision in the third quarter or was it just the right time to do it because of the lower tax rate, etc.?

No, we actually went through a really defined methodology. And when we looked at that specific customer, we made a determination that was more likely than not that we were going to have a loss associated with that customer. And so, we reserved the balance -- that $2.2 million balance.

Maybe help me a little with the Exxon relationship in a couple of regards. It's clear you're going to get incremental revenues from it. You said that. And you're not going to get the same kind of increment in profits. And therefore, margins will be lower. But should one expect incremental earnings from this in '07 relative to what you got -- would have received if they had stayed a transaction processing customer?

Yes actually. If you look at this -- look at it as a continuation of a great relationship, and our revenue is getting grossed up as well as some of our costs, most specifically our credit loss and our operating interest expense, yes. But it's still throwing off what we would consider to be a strong profit.

So I mean is it fair to say your profits will be greater from this than if you had maintained itself as a transaction processing customer?

Yes.

Now what specifically can you do? Because you said you thought you had a lot of potential here to grow the business beyond this. What specifically can you do to try to enhance the business in terms of your revenues and earnings?

Well, I think the fact that ExxonMobil has given us the confidence to take over their entire sales and marketing program where we will basically have inside sales, outside sales and a complete marketing budget -- extensive marketing budget to go after small fleets, leveraging their brand into the marketplace. So, we just see the ability now to apply what we believe is our strength and that is our front-end sales and marketing capabilities now with a great brand in the small fleet marketplace.

Where in the past as I said in the prepared script, we have to rely somewhat on the private-label relationship partners to drive their own growth. In this case, we at least have the ability to work with ExxonMobil with this private-label relationship here and we can drive the growth.

So, the big benefit would be on the small fleet size you think?

Well, that's primarily -- I mean a lot of their business would be in the small fleet. They also can reach into the mid market but their portfolio is primarily small fleet related.

Now, what will you be -- will you be offering an Exxon card? How will that work?

Yes, they have today an ExxonMobil Fleet Card only good at ExxonMobil locations. So it's just branded ExxonMobil. That continues in the marketplace. So, the change is we're now going to be the funder and the payment processor on that relationship. And then as you said, we're also going to be the marketing and sales engine to help drive growth on that relationship.

Got it. That's great. So can we look for an increment there in '07, or will it take longer than that in terms of your astute marketing effort?

We see upside starting in '07.

That's great. Good job. Thanks.

Greg Smith, Merrill Lynch.

I just want to be sure the ExxonMobil deal, are you actually acquiring the portfolio? Are you purchasing it from them or is this just a change in the contract?

We will be purchasing the portfolio.

Are you going to disclose any details on the price?

Well, I guess we would say -- we don't talk specifically and give you a specific number. But it would be about $100 million rough order of magnitude and we will use our bank to fund that.

Yes, so this clearly needs to be accretive to profits versus what the prior relationship would look like, right? I mean you essentially confirmed that.

Yes. But what we said is it's not in relationship to the growth in revenue because you are seeing also growth up in expenses.

Yes, okay, no. I think that's pretty clear. And then, with this sort of large outsized write-off you have in the quarter, are there any lessons learned here? Were there any red flags in hindsight you could've seen or was this just completely unforeseen and is just unfortunately normal course of business sometimes?

Well, I would say it is atypical for us to have a loss that's that large. And we've got lots of controls in place to prevent that. With this particular customer, they are continuing to fuel and are not in bankruptcy. So it is a customer we're still continuing to work things through with them. But we think at this point, it's more likely than not that we will lose that $2.2 million.

And then, this issue with major oil companies selling locations. What's driving that? Is that a new trend and should we be worried about it in the future?

No. I think to some extent -- we can't go into the specifics because it's their specifics -- but sometimes they decide to divest of certain markets for different reasons and move out of certain markets. From the information we've been able to gather back, that is over. But again, we cannot say anymore then we are not in control of that. They are just telling us at this point they don't see any more of that happening in the near future. But we can't say any more than that's the information we are getting back.

Just two more questions. The MasterCard revenues -- clearly the volumes are growing by gangbusters. But the revenue growth is a little bit slower. What is causing that mismatch?

We've seen it in the last several quarters, something that is similar to that where the rate is down year-over-year, which is affecting the revenue growth.

And then last, the mismatch on the hedging, that has continued to work in your favor sporadically. Have you had -- since you have started the hedging program, has it worked against you? I can't recall a situation where it has.

It has worked to our favor, have been neutral six of seven quarters. The first quarter we had $0.01 of negative mismatch. At that point, we actually changed the program to lag two weeks so that we thought we would tighten that up even better.

That's right.

[Reggie Smith], JPMorgan.

I guess I was hoping that you guys -- you kind of alluded to it on the prepared remarks, but I was wondering if you can break out the components of the credit provision? So, it seems like there's a $2.2 million charge and then there was some I guess residual stuff from the payment processing portfolio.

It is. The $2.2 million charge -- and we said that that's about half between the fleet segment of our business and MasterCard. And so if you strip that out of the fleet segment, you would get about 8.5 basis points roughly on the fleet segment and very little else on MasterCard -- is the bulk of the loss on the MasterCard side.

Then my last question, I've been trying to reconcile the wholesale spread and retail spread. And I was curious if you guys would disclose I guess where that contract settled at this past quarter.

That is not something that we are going to disclose at this point.

(Operator Instructions). Andrew Goffe, OSS Capital.

Congratulations on the Exxon deal. Can you just go over how to think about the numbers again? It's 21 million transactions. Do we assume like a same average expenditure per transaction and then the overall margin on the overall business goes down 0.5% to 3%?

Sure. Yes. What we said is we anticipate about 21 million transactions moving from transaction processing transactions next year to payment processing transactions. And that will reduce our payment processing rate between 5 and 10% -- 5 and 10 basis points, excuse me. And you also see an increase in both bad debt and operating interest, and that will lead to a decline if you kept the price of gas neutral and our pretax margins between 0.5% and 3%.

In order to model the increment from revenue, you take 21 times the difference between payment processing and transaction processing average whatever, right?

Well, one way to model it would be to take -- yes, you could -- we would back it out actually in our models of the transaction processing revenue model that we have and convert it over to the payment processing model.

And then for the 100 million, what kind of -- what do you assume on that in terms of increased interest expense?

It would be -- our CDs tend to run around the LIBOR plus 40 basis points at the point that we are locking in. This is just a general rule of thumb.

Well, congrats. It sounds like a great deal.

Greg Smith, Merrill Lynch.

MasterCard obviously came out with this sort of cap on interchange rates on retail fuel prices. I know that shouldn't directly impact you but just any updated thoughts? Are you getting any pressure from customers to do something similar?

No, we've had no requests from the oil companies coming back to us asking for any of that. We know that the average they had really impacted very low number of transactions because I think it was over a certain amount they basically were capping it. But we've had no feedback from that directly.

Then just what about -- there's some chatter out there about fuel retailers more receptive to accepting ACH-based debit cards, anything on that front that we should be watching closely?

I guess they've been doing that I thought for a while accepting debit cards.

Well no, but sort of focusing on ACH-based debit cards as a new low-cost alternative even to traditional debit just because of the interchange fee is so much lower. There's some guys like Debitman out there, and there's been some articles written about fuel retailers interested in the product. Just wondering if it is going to cross your radar screen at all.

Yes, it really hasn't -- something that we've paid attention to, so I can't say we have.

Fair enough.

At this time, we have no further questions. I would like to turn the conference back over to Mr. Mike Dubyak for any additional or closing remarks.

Well, thank you, Sheila, and thanks everyone for listening. We look forward to speaking with you again next quarter, so this concludes our call. Have a great evening.