WEX Inc (WEX) 2006 Q4 法說會逐字稿

Good day and welcome, everyone, to the Wright Express Corporation Fourth Quarter and Year-End 2006 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions and answers after the prepared remarks. [OPERATOR INSTRUCTIONS]

At this time, for opening remarks and introductions, I would like to turn the program over to Mr. Steve Elder, the 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. 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'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 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(a) filed by the Company on November 20, 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 mention that the news release we issues this afternoon contains a new table that presents a wider range of selected non-financial data than we've provided in the past. This is in response to investor feedback we're received over the past couple of months and we hope you find it helpful.

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

Good afternoon everyone and thanks for joining us. If you look at the fundamentals, bringing in new business, servicing our accounts at a high level, maintaining strong margins and generating health cash flow, this was another solid quarter for Wright Express. The share repurchase program we just announced reflects our confidence in the business. Melissa will have more to say about the program later in the call.

The front end of the business, the part of the operation that generates new business and traditionally, adds roughly 10% to our active vehicles, year after year, continues to operate at high levels. We're seeing continued solid growth from new vehicles added and our sales and marketing productivity remains high.

In our fleet business, we exceeded our fourth quarter goals in every one of our direct sales channels. We're also seeing continued strong growth in MasterCard volume. The annuity side of our business, the existing accounts that drive the bulk of our transaction volume did not perform as well this quarter. Our overall volume growth fell short of what expected, in terms of number of transactions per active vehicle and credit loss. This is more than a function of UPS dropping off and the closing of private label station locations that we discussed last quarter. We've seen a slowdown in volume across the portfolio. In our experience, when growth in commercial activity begins softening, we're one of the first to feel the effects.

Based on our results for the fourth quarter, and considering January activity, we're being cautious in our short-term expectations for the annuity side of our business. To be clear, we're not seeing any degradation in portfolio aging. Our growth engines are performing well. We're still signing up new customers. And our voluntary attrition remains at less than 3%. We still feel good about the fundamentals of bringing in new accounts and we still feel good about managing our partners' portfolios and producing high levels of customer satisfaction.

If you look at our geographic coverage, capabilities in acquiring and activating new vehicles, maximizing retention, and portfolio management, nobody is better in optimizing every aspect of the life cycle of a fleet customer. Nobody captures a wider range of actionable data or delivers more powerful purchasing controls. And our focus on service and our ability to generate customer satisfaction gives us even greater advantages over the competition. So let's look at what we're doing to build on these advantages.

We can't control the economy but what we can do is continue to invest and build for the future growth and success. We are absolutely bullish about our business model and we are positioning and investing for future growth opportunities. With a market of about 41 million commercial fleet vehicles available and roughly two-thirds of them not using fleet car products like ours, our top growth goal is to continue making progress in penetrating this untapped market. Our objectives are to forge profitable, strategic relationships that endure for the long term to create strong, satisfaction-based account partnerships and to consistently win business based principally on the quality of our products and services. It makes the most sense to review these initiatives by market segment and I'll start with small fleets.

Over 70% of the commercial vehicles in the U.S. operate in small fleets, so this is where we see the greatest potential for gains and volume. Including both our direct and private-label channels, the total number of small fleet vehicles we serviced in the fourth quarter was down 2% from Q4 last year. The private label channel, which is typically comprised of small fleets, continued to under perform and the number of vehicles serviced in this channel was down slightly from a year ago. This is the segment where we terminated inactive vehicles in Q2 and with a loss of some of the major oil companies' locations also reflects us -- affects us most directly.

Looking only at the direct channel, however, the number of small fleet vehicles serviced through the Wright Express universal product grew 17% from Q4 last year. For the past couple of years, our direct channel has been the main engine for small fleet growth; that's because with our universal product, we control the sales and marketing and this makes a tremendous difference. We can leverage our strengths in predictive database modeling, in turning leads into applications and in getting vehicles activated to generate new business.

Looking forward into 2007, one of our top priorities is to jumpstart small fleet new business growth in both our private label and distributor channels. In our private label channel, we don't typically have direct control over the sales and marketing but we're working to change this in the future. We see a significant opportunity to drive growth in our two largest private-label portfolios, Exxon Mobil and Imperial Oil of Canada, by directly controlling their marketing efforts and leveraging what we've learned from successfully marketing our universal product.

Last quarter, we announced the ten-year extension of our long-term arrangement with Exxon Mobil. We'll be providing them with a full range of outsource private-label services. These will include marketing and account acquisition through our own inside sales organization and an outside sales force fully dedicated to growing the Exxon Mobil portfolio.

In December, we announced the ten-year extension with Imperial Oil of Canada that demonstrates the same kinds of strengths. Their SO branded fuel stations are Canada's largest fuel retailer chain. We look forward to continuing to invest in this relationship, which gives us direct control over SO Canada's committed marketing budget. We're dedicated to providing Imperial Oil with front end and portfolio management services that enhance their success in customer acquisition and retention. We look at Exxon Mobil, Imperial Oil and our other strategic relationships and feel good about how they position us to drive long-term growth. By extending their relationship with us and expanding the services, they are confident in our abilities to drive growth through portfolio management and our strengths in four A's of generating and sustaining business volume: Account acquisition, approval, activation and attrition management. Now that our contract negotiations are behind us, we anticipate significantly stronger activity within these portfolios in 2007.

As I just mentioned, we also see opportunities to generate growth in the small fleet market by developing new products for the fuel distributor segment. Last quarter, I mentioned that we're working on a program with Pacific Pride which has one of the country's largest distributor networks.

The first phase of the program is now in place. The product testing, with a small number of Pac Pride distributors that I mentioned last quarter has gone well. Pac Pride is currently adding distributors to this new offering and were in the process of building a strong pipeline.

In the second phase, slated for the second half of 2007, Pac Pride distributors will be able to have us fund their receivables. Ultimately, our goal for the program with Pac Pride is to support a full-featured card offering across the entire distributor network. We're leveraging our work with Pac Pride in developing a broader set of distributor program upgrades. Distributors will be able to manage their accounts and their activity by driver, and vehicle by using an online interface. They'll be able to choose the exact level of support they want from basic services to a funded, fully-managed program that will give distributors the flexibility to offer programs with three available levels of acceptance: Private label, private network and universal. Combining these enhancements for distributors with our private-label initiatives, which I will talk about later, should position us to extend our reach into the small fleet market.

In the large and medium fleet market, our strategy is much the same as with small fleets: Delivering a stronger value proposition across a wider range of differentiated services. In this market, however, differentiating our product means delivering much higher levels of data integration, customization and fleet management consulting. Our success in attracting large and medium fleets is centered in the direct and co-brand marketing channels, precisely because we can offer a premium level of service. Our vehicle count in this segment was up 7% from Q4 of last year, with roughly equal amounts of growth coming from direct and co-brand. We have a dedicated rapid response team that provides customized solutions for this marketplace.

Before turning to MasterCard, a quick update on heavy trucks. We're continuing to hit our internal benchmarks for penetrating this market. Our sales team is in place and we have an attractive heavy-truck product to sell. For the fourth quarter, our vehicle count was up 15% from a year ago. MasterCard posted another great quarter. Total purchase volume was up 46% from Q4 last year. The reason we keep wining in a highly-competitive space is the high level of data and service that we can provide. In essence, our MasterCard product delivers the same kinds of online tools and analytical capabilities that large issuers offer to major corporations. This helps our relatively small customers level the playing field by customizing their MasterCard program to their specific needs.

In addition, we provide customized solutions to the travel sector, which is a very strong growth area. To sum up, our business is in good shape, as we begin the new year. Our growth engine is running well. In terms of products and services, we're looking forward to some announcements that will signify real progress in our strategy to continue to differentiate our product offerings in the marketplace.

We made the first of these announcements this morning. As I've mentioned before, we've been looking carefully at Telematics, the combination of GPS data with remote vehicle maintenance diagnostics. Our strategy relationship with Networkcar, which should launch in mid 2007, represents the first milestone for Wright Express in this area. The fleets we will service with Networkcar will enjoy additional operating efficiencies and enhanced safety features through real-time remote diagnostics, GPS-enabled roadside assistance and speed alerts. In addition, Networkcar plans to offer a Wright Express co-branded car to its commercial fleet customers.

Regarding adding additional features and benefits for small businesses, we'll soon be introducing an upgrade that will make it possible to download all of our account data into QuickBooks. Our small fleet customers have been asking for this functionality and we're pleased to be responding.

In the private label channel, we'll now be allowing partners to customize and configure their own vehicle maintenance networks; this is one of the most important program enhancements we have offered over the past few years. We expect cross-acceptance between the fuel locations and the service locations to help drive transaction growth in the private-label channel.

And finally, we'll be providing Exxon Mobil with the new Affinity Fleet Card program. The Exxon Mobil Affinity Card will be a universal, co-branded card that provides fleet, the primary purchase at Exxon Mobil sites, with broader acceptance at all Wright Express locations across the country.

Summing up, the past year was successful and we expect further progress in 2007. Our derivative strategy remains in place, with the goal of continuing to minimize the impact of fuel price volatility and enhance earnings stability and visibility. We will see positive results from this strategy as the year unfolds. We also anticipate excellent results at the front end of our business in 2007. Demand from new customers for Fleet Card products is strong. Our sales pipeline for the year looks good and we're committed to investing in the new products and powerful sales organization necessary to capitalize on this potential.

In addition to pursuing organic growth, we continue to seek opportunities for alliances, mergers or acquisitions that can accelerate our overall growth and/or enhance our strategic position by leveraging our core competencies.

With that, I will turn the call over to Melissa for a review of our financials.

Good afternoon, everyone. I'll pick up where Mike left off. The growth side of the business remains strong and we'll continue investing in our growth engine. As we move into the second quarter and second half of the year, we should see a significant ramp in adjusted net income. However, we're planning for another soft quarter on the annuity side of the business in Q1 and I'll discuss this further in a few minutes.

By way of background, we traditionally have higher credit losses in Q1 and Q4, but after Q1 in 2007, we are expecting credit losses to come down and for the full year, to be more in line with mid-point of our historical averages. Earnings for the second half of 2007 will also see a positive impact from the increases in our hedge [field] price as our hedge [call] improves. In addition, our guidance for Q1 includes some front-loaded investments in our core business, related to R&D and program rollouts and these should be partially offset with new product revenue in subsequent periods.

When you consider the Company's ability to generate cash, this was our best quarter since becoming a public company, primarily due to the effect of falling fuel prices. As a result, we paid down $42 million on our financing debt in the fourth quarter. This leaves us with a balance of approximately $150 million in financing debt. For the year, we paid down more than $70 million, which is more than our adjusted net income. As a result, we brought our leverage ratio down to approximately 1.5 times.

We've been discussing options regarding deploying cash and earlier this week, the Board approved a share repurchase program of up to $75 million over the next 24 months. The buybacks will be funded primarily through the Company's future cash flows and will be made on the open market and may be commenced or suspended at any time. The program allows the Company to repurchase shares at management's discretion, based on market and economic conditions and other factors.

In terms of capital expenditures, we are maintaining our commitment to reinvest the Company's increased cash flow in ways that strengthen the front end of our business. CapEx for 2006 was $12.5 million and we expect to reinvest $13 million to $15 million in 2007. As a result, we expect depreciation to increase slightly in 2007.

That said, looking specifically at the fourth quarter, we saw mixed financial results in the business. Net income to common shareholders on a GAAP basis was $19 million or $.46 per diluted share, compared with $28.3 million or $0.69 for Q4 last year. Adjusted net income for the fourth quarter was $13.4 million or $0.33 per diluted share. We saw slower year-over-year growth in transaction volume with a slight decline in the number of transactions for active vehicle. Credit loss was harder than we expected and we booked an unanticipated $1 million non-cash charge related to our stock-based compensation program.

On a more positive note, it was another solid quarter for new business generation. Also, we experienced a larger-than-anticipated positive mismatch on our derivatives. The net payment processing rate in our fleet segment was stronger than our forecast and up sequentially for the first time this year, primarily due to the drop in fuel prices.

With that as a background, let's look at the numbers for the quarter. Total revenues for Q4 increased 10% to $70.8 million from $64.4 million for the fourth quarter last year. The average number of vehicles service grew 3%. This includes the effect of the 67,000 non-revenue-producing, private-label vehicles we cleaned out of the portfolio earlier in the year. This reduced our vehicle growth by roughly 2%.

The total number of transactions processed was up 2% from a year ago to $59.2 million. Our transaction volume for the quarter was affected by a number of factors, in addition to the portfolio clean up. Our contract for the UPS terminated at the end of May 2006 and some of our private-label strategic relationships sold locations in Q2. These two factors reduced transaction growth by 3% and were included in our fourth quarter guidance.

Every year, there's a seasonal drop in transaction levels, but this year's drop-off was greater than anticipated. We measured the transaction levels by looking at the number of transactions for active vehicles. This is a very consistent measurement typically only affected by the number of business days in the period. This is the metrics that we saw drop off by approximately 4% in Q4.

Looking at the top line, in more detail, total revenue in the fleet segment of our business grew 5% from Q4 of last year. Payment processing revenue in our fleet segment was up 6% at $46.6 million, compared with $44.1 million in Q4 last year. The number of payment processing transactions was 45.1 million, up 4% from 43.2 million a year ago.

Average retail fuel price for Q4 of 2006 declined 6% to $2.37 per gallon from $2.53 for the fourth quarter last year. As a result, the average expenditure for payment processing transaction was down 4% to $48.69 from $50.64 a year ago. Our total transaction processing revenue was up 1% from Q4 of last year to $4.3 million. The number of transaction processing transactions was down 5% to 14.1 million.

As in prior quarters, this year, transaction processing volume was lower, as a result of portfolio conversions to payment processing and sales of private-label fueling locations. The average rate earned per transaction was slightly higher than in Q1 a year ago, reflecting the change in the mix of contracts.

As Mike said, our MasterCard business continued to perform well this quarter. Total purchase volume was up 46% from Q4 last year. The MasterCard segment contributed $6.1 million in total revenue in Q4, compared to $2.7 million a year ago. MasterCard payment processing revenue rose 72% to $4.1 million from $2.4 million from Q4 last year. This growth was directly attributable to higher spend volume on a purchasing card product.

During the quarter, we sold the shares of MasterCard Class B stock we received from their [IBO]. This generated total proceeds in pre-tax income of more than $1.6 million, which is included in other income.

Turning now to operating expenses, the total for Q4 was $42.2 million, compared to $33.2 million in the fourth quarter last year. The major factor increasing expenses was credit loss, which on a total basis, included both fleet and MasterCard, was up by $3.9 million from last year to $5.5 million.

In the fleet-related business, credit loss is a percentage of total payment processing expenditures with 23 basis points this quarter, compared with eight basis points a year ago. This is above the high end of our five-year historical average, 11 to 22 basis points. In our MasterCard segment, total credit loss expense in the quarter was approximately $500,000.

Included in both the fleet and MasterCard credit loss this quarter was a reserve of approximately $800,000 related to a single customer we talked about on the call last quarter. The reserve was split $600,000 for the fleet segment and $200,000 for MasterCard. Without this one customer, our credit loss would have been 20 basis points in the fleet segment and in line with historical results in the MasterCard segment.

When we look at the overall health of the portfolio, if anything, it looks as if the credit quality's improving. We've seen deterioration in the portfolio aging in the public sector SIC codes which we don't believe has significant associated risk, however, these accounts are taking longer to pay, so our reserve methodology requires us to reserve more.

The other major increases in expense items were in salaries, service fees and operating interest expense. Salary expense was up by $900,000 from Q4 last year. The increase reflects additional staffing in our sales, IT and finance areas, with about half of the overall increase focused in sales and marketing. Service fees increased $2.5 million this quarter. This includes the non-cash charge of $1 million due to a refinement of our accrual for stock compensation. Let me be clear that this is not related to stock options or any kind of backdating. We do not expect this to result in any material expense increase in future quarters.

In addition, we saw an increase in the use of contractors related to our implementation of Sarbanes-Oxley and we had additional expenses related our restatement. These latter two items were factored into our guidance for Q4.

Looking forward into 2007, we're continuing to press for enhanced efficiencies and streamlining in various areas of our business where costs can be reduced without affecting our ability to grow and provide the premium service our customers expect. We look forward to positive impacts on the expense side from these initiatives this year, and especially, in the second half.

Operating interest expense was up $900,000 from Q4 a year ago. As in prior quarters this year, the increase reflects higher interest rates and average debt levels. Our effective tax rate, on a GAAP basis, was 38.4% in Q4, compared to 32.1% for the fourth quarter of 2005. Our adjusted net income tax rate was 35.2%, compared with 37.6% year ago.

We expect our 2007 adjusted net income tax rate to increase to between 37% and 38%. This is due primarily to our expectation of a change in the mix of earnings between legal entities, which will result in a higher effective state tax rate. Let's turn to the derivatives program for a moment.

As you know, we purchase derivates instruments quarterly to manage the Company's fuel price-related earnings exposure going forward and that program will continue. During the fourth quarter, we recognized a real life loss of $4.3 million before taxes on these instruments and an unrealized gain of $10 million. Due to the unusually high retail fuel margins experienced this quarter, we've recognized approximately $0.04 of additional earnings per share for the difference between additional revenue received and the cash settlement with our counterparty. Some of this was included in our guidance last quarter.

As a reminder, in '05 and '06, we effectively hedged 100% of our earnings exposure to changes in fuel prices. In 2007, we have hedged approximately 90% of that exposure. At this point in time, we've completed 75% of our purchases for 2008. The weighted average price range we've locked in for 2007 is $2.33 to $2.40 a gallon, compared with a high of $1.95 for 2006. The prices we've locked in so far for 2008 or even higher than 2007.

Due to falling fuel prices, our accounts receivable balance, net of reserves for credit loss declined this quarter to $802 million from $839 million at the end of Q3. The year-end balance includes about $87 million in receivables, associated with our purchase of the Exxon Mobil fleet portfolio that occurred just prior to the end of the year, which reflects our transitioning of this portfolio to a payment processing relationship.

Here are some facts related to the Exxon Mobil fleet business that we expect to impact our business. As we talked about on the call last quarter, approximately 20 million transactions will flip to payment processing relationship, which will significantly increase revenue. Our payment-processing rate will be about five to ten basis points lower than 2006, reflecting the fact that we are now funding these transactions. In turn, we'll have higher operating interest expenses and higher loss rates, in terms of both dollars and basis points, as the portfolio is comprised mainly of small fleets.

We will also see higher sales and marketing expenditures due to taking on this business. I'll conclude with our financial guidance for the first quarter of 2007 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 futures price is in the middle of our hedge range; therefore, our earnings will float with changes in fuel prices for the first few pennies' change in either direction. This guidance also reflects no positive impacts from hedge mismatches and the measured outlook on growth and transaction volume for the first quarter.

In addition, we have not included any upside for potential share repurchases. For the first quarter of 2007, we expect to report revenues in the range of $65 million to $70 million. This is based on an average retail fuel price of $2.34 per gallon. For the full-year 2007, we expect to report revenues ranging from $290 million to $310 million. Based on an average retail fuel price, that's $2.37 per gallon. As for earnings, for Q1 of 2007, we expect to report net income, excluding unrealized gain or loss in derivative instruments, in the range of $13 million to $14.5 million or earnings per diluted share of $0.32 to $0.35. For the full-year 2007, we expect to report net income, excluding unrealized gain or loss on derivative instruments in the range of $71 million to $75 million or earnings per diluted share of $1.71 to $1.81 on approximately $41 million shares outstanding.

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

+++ q-and-a

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Robert Dodd, Morgan Keegan.

Hi, guys. Could you just explain to us again, on the service fee line, you had some expenses related to restatement and then some extra, you know, related to Sarb-Ox, which might have been factored into your guidance but can you characterize how much is non-recurring, in terms of how much we see drop out in Q1? It might be made up from other things, mind you but --?

For the full-year basis, we spent about $1.5 million on SOX-related costs. We expect that to go down in 2007 but we'll, obviously, have some continued costs associated with that, just because we need to continue to go into -- move into year two of compliance. But the biggest item in there, which I talked about is the $1 million related to our refinement in the estimate of our 123. And there's about $400,000 in there also of restatement costs and those two things, [you'd say], will not be recurring.

Right, okay, and then on the credit loss side, how much do you have still remaining associated with that one customer you've taken the two reserves for, so far?

Sure. Just to kind of bring you up to speed, in the last call, we talked about the fact that they were continuing to be a customer of ours -- that's changed. We actually terminated the customer relationship and there's a balance outstanding of about $3.7 million. We reserved $3.1 million, which is our best estimate of the collect-ability of the account.

Thank you and then one more, on the Exxon portfolio, I know that you've got control of it. I mean, how much cleaning out did you do of the Exxon portfolio, if any, in the second quarter and how clean is that portfolio of inactive accounts at this point?

Yeah, all I would say is that even during the transition from transaction processing to payment processing, there was also some clean up. So we think, at this point, their portfolio is probably as clean as it can be, knowing there's always some level of inactive accounts and inactive cards within a portfolio but I think they've done a good job during the year, knowing there was going to be a transition to clean that portfolio up.

Okay, thank you.

And our next question will come from Paul Bartolai with Credit Suisse. Sir, your line is open. Please, go ahead.

Can you hear me?

Yes.

Yes.

Good afternoon. Just on the one-time items, just so I'm clear, the negative factors in the quarter were the $800,000 credit write-off and the $1 million stock comp accrual -- are those the two mains that you highlighted in the quarter?

Yes, that's correct and then the transaction [drop off] from what we would normally see.

Right and then you said you had a benefit from the sale of MasterCard shares. How much was that?

About $1.6 million.

That was in 4Q?

Yes.

Okay and then as you look at guidance, you mentioned, in 1Q, there was going to be some elevated expenses for the Exxon contract. Any chance you could quantify what we're talking about here?

Actually, it would be an elevation of both revenue and expenses within the first quarter -- and you'll see that carrying forward into the rest of the year. So we'd see an increase both in our credit loss provision, because those accounts will have a higher loss rate, as well as funding of that portfolio.

So if you look at a little bit less than $90 million of funding will provide an [Inaudible] interest in operating interest expense associated with that. And then an increase in sales and marketing costs -- and we talked about that being roughly about a dozen employees that we're going to take on, as part of that portfolio.

Okay and as you look at the progression throughout the year in '07, you mentioned the ramp-up during the year, can you give us some sense of the magnitude of what you're expecting, in terms of existing customer growth? I mean, you talked about the 4% decline in 4Q. Can you maybe give us some sense of what you're expecting in 1Q and what that should look like throughout the year, right now?

In the first quarter, I think we are expecting something similar in the range of what we saw in the fourth quarter of 2006. As we said, we took more of a measured outlook for the first quarter and then looking at that, increasing to more like normal ranges, as you get to the end of the year.

Okay. Thank you.

And our next question comes from Tien-Tsin Huang with J.P. Morgan.

Hey, good evening, guys. It's actually Reggie, filling in for Tien-Tsin -- he's out of the country. I guess I had a question on the hedge. I think you guys quantified what the benefit was this quarter. I was hoping you could, I guess, repeat that. I think I missed it.

Sure. We said that it's about $0.04 of positive mismatch associated with hedge in the fourth quarter.

Fourth quarter, all right. And then, I guess, lastly, could you guys talk a little bit more about the transaction growth slowdown, kind of any, I guess, hypothesis on what's driving that?

Yeah, we've spent a lot of time talking to customers of all fleet sizes and it really is across all of SIC codes that we service. Some may be a little more than others but basically, it's across all SIC codes. It's not specific by geography; it's across the country, by fleet size. And we have been asking questions like, is it conservation but it's really business slowdown is what we were hearing as the reason it really dropped off.

We usually have seasonality in November and December and somewhat in January, so that's factored into our guidance but this was an addition to that, just basically an economic slowdown that we felt across the portfolio.

One other question, does the same -- I guess you guys, in the past, have talked about what impact the hedge or I guess the shift the hedge will have on EPS and how that kind of flows down. Does the same rule apply? Is it still $0.10 for every -- go ahead, I'm sorry.

It's a rough order [Inaudible] yes.

Okay, so still roughly $0.10, all right, thank you.

You're welcome.

And we'll go next to David Parker with Merrill Lynch.

Good afternoon, everyone. With the broader disclosure of the non-financial information, you listed the discount rate, which we actually was an up tick in the fourth quarter. Can you talk about why it up ticked after being flat for the last two quarters?

It went up for a couple of reasons, one of which is because if the price of gas declines, we actually will see a benefit in that percentage for two reasons: Because they had some hybrid contracts where we're paying people a fixed transaction fee in a smaller percentage fee. So on a percentage basis, we earn a higher percent if the price of gas declines. And then secondly, just because of how some of the rebates they give back to our customers are structured.

And so that was the bulk of the difference but then, in addition to that, we had some settlements with some of our end customers, based on where they sat on their annual incentives and that caused a little bit of favorability that you wouldn't expect to repeat a few basis points.

Okay and then with the next stage of the 2008 hedge to be rolled out, where do you think you could roll it out? I mean, is it at similar levels that you've rolled out to previous hedges?

Yeah, the last purchase we made was a range of 247 to 253 and the last quote that we received would be a slot price of about 240ish. So it's down slightly.

Okay and then just last question, with the [announce] to buyback, can you just talk about your priority for cash usage between acquisitions, buybacks and debt pay-down?

Yeah, I think that knowing that we paid down $42 million, in terms of our debt. We, basically, got to the range of what we've been saying would be our somewhat reasonable leverage range and we still will be looking to invest in our bu9ienss. I think we're doing that through CapEx. If the right acquisition came along that would help us in our growth strategy, our diversification strategy, we still would look at that. And then just speculation on how big is that? What is the size and what would that mean to, say, the repurchase? But at this point, we feel comfortable that we're investing in our business and we can support the repurchase program.

Okay, thanks, guys.

And we'll take our next question from Abhi Gami with Bank of America.

Hi, thanks. A couple questions. One, if you compare the volume drop-off, based on what you're calling economic factors to the last time you saw similar behavior, is there a pattern? Did it kind of creep up on, last time, as well, kind of unexpectedly, in a relatively short period of time, across your entire base? I think if you'd provide more color there, it'd be more helpful.

Yeah, the one thing I can say, Abhi, is that I think which was unusual for us, this was happening during a period of time that's all -- November and December is kind of a little difficult to forecast because of all the holidays and how things happen. So as we started to get into November and December and see some drop off, we weren't sure how much was seasonality, the way we were forecasting actual business days. But as we kept further into those two months, we started to realize there was a drop off. I don't know if I can compare it. I think, in the past, it might have been a cleaner chance to say, hey, we're seeing something across the board. This time, it probably took us a little bit to really analyze to make sure it wasn't seasonality and it really was an economic downturn.

I think, Abhi, too, the last comparison points you'd have are things like a tech bubble bursts and everyone was aware of it or September 11. When you saw something that happened on a macro level and that being reflected in our portfolio.

Okay, great. Switching gears, on the Exxon and [SO] relationships, can you say what percentage of your total private-label business those two are combined?

Actually, I don't think that we've commented on individual customers. That's not significant enough that we need to disclose it. If you combine the top five, I think we said it's about 23% of our revenue, of all the larger strategic relationships.

Not just the private labels, the top five all strategics?

Yes. Yeah, rough order, it's about 23%.

Okay. So if you are able to take, you know, take control of their marketing efforts and ramp up growth within those bases, is that enough to move the needle in your overall private label portfolio?

Yes, I mean, they are the largest two private-label programs that we have and knowing we now have direct control over the sales and marketing of at least Exxon Mobil and the marketing of IOL, we feel comfortable that we can see stronger growth from them that will affect the private label. We've also said private labels, the volume there sometimes get impacted when we bring on new portfolios and we think that may be a possibility in the future.

And finally, if you've already started that effort with those two particular partners, how long do you think it will take before you start to see the fruits of that work? Does it take a couple quarters to [Inaudible] to get into the field or can you see some instant results?

Yeah, I mean, once we were able to secure the relationship, it's getting the sales force in place and so that really took place during December and finalized in January and part of this month, actually. But there were some mailers that dropped. By the time you get the responses, get people following up, getting those closed, getting the apps in, getting the cards active, there is a lag time. But we did start that process late last year.

So within your modeling process, when do you really think the growth rates from that particular segment starts to improve? What's realistic?

Probably -- we're going to probably see the impact in the second half of the year.

Okay. Okay, great. Thanks, a lot.

[OPERATOR INSTRUCTIONS] We'll go now to Michael Weisberg, ING Investments.

Hi, everyone. Help me with something, if you have a customer with, say, ten trucks and he -- business is soft and one of the trucks isn't running, when do you stop counting that truck?

You know, well, as long as he still has the trucks on the books, we would still count the trucks. So we would just see lowering of active cards for that account.

Okay, so in other words, you would still -- if there was one truck with basically zero volume in a quarter, it would still be, you know, part of the contract, so that would count in your numbers?

It would count as a vehicle that we're servicing.

Right.

It wouldn't show up -- the indicator that Mike's talking about or is saying the number of transactions per active vehicles. It would not be included in that because it wouldn't be considered to be active.

I see. What do you have to do to be active?

You actually -- it'd have be used within the month.

Within the month, okay. So -- because you would think, given the slowdown we've seen in the trucking business, people would be, you know, maybe downsizing the number of trucks out there, which if that were the case, wouldn't affect that metric, right? In other words -- because you're looking at active [Inaudible], so the implication is the vehicles are just -- are in service but used less frequently?

But you'd have less vehicles in service then and less active vehicles under that scenario.

Right. Right.

And I think what we're primarily seeing, we've seen a little bit of a degradation in active vehicles but it was mostly in what we're seeing as transactions per active vehicle. That's what really dropped and impacted us and it really was, as we said, across the board.

Great and I guess that's just reflecting the fact that they're using the vehicles less often during the month.

Yes, just filling up less often, exactly.

Great.

But some of those aren't necessarily heavy trucks. You know, they're sales vehicles, they're mid-sized vans that are delivering products. It's a whole host of things and it's -- it's different, depending on the vehicle's size or the SIC code, there's really much difference.

Okay, Melissa, would you help -- just looking at so many analyst numbers, the higher tax rate, both for fourth quarter and for '07, will those two, I guess, general expectations, by my reckoning, there's about maybe almost $0.02 fourth quarter and maybe $0.06 '07.

The impact isn't to '07. It's about $0.05ish.

Okay, so I thought there was an impact in fourth quarter, as well, wouldn't it?

The rate that we came in at, I believe, is pretty close to the analyst model.

Okay, but what was the fourth quarter rate? Am I wrong? Wasn't it higher or am I wrong?

The fourth quarter rate's the same rate we've had the last couple of quarters.

Oh, it was, okay. Then, I'm wrong. And so that would be -- that would not be a factor in the call you just reported but it would cost -- it would take the numbers down about $0.05 for the New Year.

Yeah, rough order. Yes, in 2007.

Great, and that -- did you say the $3.9 million write-off, that reflect -- $3.1 million, that reflects an incremental $1 million-ish for fourth quarter?

$800,000.

800 -- that's right, you mentioned $800,000. Great, thanks, a lot.

Thank you.

Thank you.

And at this time, we have no further questions standing by. I'd like to turn the conference back to Mr. Dubyak for any closing remarks.

Thank you, Millicent and thanks, everyone, for listening. We look forward to speaking with you, again, next quarter. This concludes our call. Have a good evening.

Thank you, everyone, for your participation on today's conference. You may disconnect at this time.