WEX Inc (WEX) 2007 Q3 法說會逐字稿

Good day, everyone. And welcome to Wright Express Corporation's third quarter 2007 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 morning. And thank you for joining us. With me today is our CEO Mike Dubyak, and our CFO, Melissa Smith. The press release we issued earlier this morning is now posted on the Investor Relations section of our website at WrightExpress.com. A copy of the release has also been submitted as an exhibit to an 8-K we filed with the SEC.

We'll be discussing a non-GAAP metric. Specifically, adjusted net income during our call. Please see Exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income.

As we announced last quarter, we have modified the definition of adjusted net income slightly to also exclude the amortization of purchased intangibles. In addition, as you've probably seen by now, this morning we also announced that Citi will be outsourcing their commercial oil card portfolios to Wright Express. That press release also was posted on our website.

I'd 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 factors, including those discussed in today's press release, our Form 10-K which was filed on February 28, 2007, and our other SEC filings.

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

Good morning everyone, and thanks for joining us. Operationally, the business continued to perform well this quarter, and our financial results beat our expectations. Adjusted net income exceeded the top end of our earnings guidance by $0.02. Melissa will cover the moving parts in detail, but the earnings upside relates to two key factors, strong revenue and the mismatch between wholesale and retail fuel prices in the quarter.

Finalizing the agreement and relationship with Citi, which we announced today, has been a major focus for us and represents a future step function in our growth in the private label line of business. Including our current agreement with Exxon Mobil, signing this contract enables us to process three of the ten largest U.S. proprietary oil company fleet card portfolios as cited in the September 2007 issue of the Nilson Report, a publication that covers payment systems worldwide.

With this long-term transaction processing agreement, Wright Express has locked in organic growth over at least the next two years, and an incremental revenue stream that will not flush away with the price of fuel.

Citi selected us as their fleet card outsourcing partner to lever our strengths in portfolio management. Our role is to do all the account servicing except for funding, which eliminates our exposure to credit loss, and provide marketing services for their portfolio partners.

With Citi continuing to fund the portfolios, we'll bring our skills to bear in helping Citi's oil company partners market their private label programs more aggressively, as well as providing outstanding portfolio management and customer service.

Looking farther ahead, the agreement also specifies that Wright Express and Citi will collaborate on future business with major oil companies where Citi can offer consolidated consumer and commercial funding and processing services using us as the processor for the commercial products.

We're excited about the future prospect for this relationship, and look forward to working with Citi for many years to come.

While developing the relationship with Citi, we've continued to grow our business. In the fleet side of the business, the total number of transactions processed this quarter increased 3% to $63.4 million, from $61.8 million for the third quarter last year. Although the increase was slightly below our forecast for the quarter, the average size of each transaction was larger than we expected.

Our sales force continues to do a good job of bringing in new business. We also continue to retain customers at very high rates. Our voluntary attrition rate was less than 2%, which is lower than historical results. We saw a solid performance in our direct and co-brand marketing channels, which translated into another quarter of growth in the midsize and large fleets. The number of vehicles in this category increased 7% from the third quarter last year.

This was also another good quarter in our heavy truck business, where we continued to see double-digit growth. The sales people we've added this year in heavy truck are building great momentum, and our vehicle count was up 16% from Q3 last year.

Overall, the number of small fleet vehicles was flat this quarter compared to Q2, and down 5% from the third quarter of 2006.

Growth in the Wright Express Direct channel was offset by underperformance in private label. Consistent with the past several quarters, the number of private label vehicles was down 11% from Q3 last year. At the same time, in our direct marketing channel, small fleet vehicles increased by 12% from the third quarter last year.

In addition to the Citi announcement, which is focused on the small fleet market, another small fleet initiative is the program we're building for fuel distributors in our relationship with Pacific Pride. We remain on track to complete the development of the program near the end of this year or early next year.

We are continuing to work against some headwinds in the fleet marketplace. As we have mentioned in the last several quarters, we still see a small decline year-over-year in customer usage patterns with existing accounts. Businesses that have grown in the past are growing more slowly this year, and are simply fueling a little less frequently.

Our long-term strategy to diversify our revenue streams will help mitigate exposure to fleet car transaction growth and sensitivity to fuel prices. In addition to the outstanding growth we have seen in our MasterCard product over the last several years, we are building products to serve the construction vertical. We are increasing the wallet share of current fleet customers with the Telematics product, and we are penetrating current merchant and fleet relationships with the TelePoint product.

Our TelePoint business, acquired during the quarter, is working out well. As a reminder, the TelePoint application suite is an information solutions product that enables fuel merchants, distributors, and fleets to improve the efficiency of their fuel replenishment, buying, and administrative operations.

TelePoint revenue for Q3 was in line with our forecast, although still a relatively small number right now. However, we're optimistic about the growth opportunities with TelePoint. For example, BP has significantly expanded their relationship with TelePoint to bring on several thousand new sites.

Both the Wright Express and TelePoint sales groups are very enthusiastic about the potential to leverage our channels and our partner and fleet relationships to create new opportunities for cross-selling. We're beginning to capitalize on these opportunities by identifying prospects within our current customer base, and we've held productive meetings with a number of them.

We continue to expect that TelePoint will generate approximately $8 million in revenue for 2008 including the BP contract, while maintaining their strong margins. We still expect the acquisition will be slightly accretive to our earnings within the first 12 months, on an adjusted net income basis.

This was another great quarter for our MasterCard business. Purchase volume grew 40% from Q3 last year to $511 million. We're continuing to win MasterCard business from competitors, as well as seeing success with the single use account product we've developed for the online travel industry and more recently, the warranty business.

Our single-use account product is well suited for businesses that make large volumes of payments to a fragmented merchant base that's comfortable accepting credit card payments. We're in the process of adding several people to our MasterCard sales force by the end of the year, and we're optimistic about the prospects for continued growth going forward.

Summing up, going into the fourth quarter we have strong earnings momentum, and we continue to deliver exceptional value to fleets of all sizes. Looking farther ahead, we're confident that we can capture a larger share of total fleet spend, diversify our revenue streams, and execute on our relationship with Citi. And we continue to seek opportunities for alliances, mergers, or acquisitions that can accelerate our overall growth and/or enhance our strategic position.

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

Good morning, everyone. We're very pleased that once again our earnings exceeded the top end of our guidance. Even though the price of fuel was $0.09 lower than expected, our revenue came in at the top end of our guidance range. The major expenses were in line with our forecast, and we again had a positive mismatch on our derivative instruments which was larger than we anticipated.

Credit quality is a topic that's on everyone's mind today. We're beginning to see some signs of minor deterioration that relate to three things. First, we're seeing early signs of weakness in the contractor SIC codes. Second, we're seeing an increase in bankruptcies, which is in line with national trends. And third, we're seeing a decrease in the recoveries on severely delinquent balances. This is consistent with the experience of third party collection agencies.

However, the overall credit quality of our accounts receivable is still very strong. We're not seeing an increase in the number of days it takes to collect payment on the portfolio, credit quality scores are consistent with prior quarters and continue to give us confidence in our projections for the year. We continue to see more than 98% of our accounts receivable balance either current or less than 30 days past due, and we have seen a decline in chargeoffs. I'll talk more about credit loss in a few minutes.

Total revenue for the third quarter of 2007 increased 10% to $87.7 million from $79.7 million for the third quarter of 2006.

Net income to common shareholders on a GAAP basis was $22.2 million, or $0.55 per diluted share. This compares to $34.4 million, or $0.83 per diluted share for Q3 last year.

The company's adjusted net income for the third quarter of 2007 increased 40% from last year to $22.4 million, or $0.55 per diluted share. This non-GAAP figure excludes an unrealized mark-to-market gain on our derivative instruments as well as the amortization of purchased intangibles.

Adjusted net income for the third quarter last year was $16 million, or $0.39 per share. In the prior year, the only adjustment to GAAP earnings was for our derivative instruments.

In terms of the critical metrics we look at in evaluating the company's performance, the average number of vehicles serviced was approximately 4.4 million, compared with approximately 4.3 million a year ago.

The total number of transactions processed this quarter increased 3% to $63.4 million from $61.8 million for the third quarter last year.

The number of payment processing transactions increased 15% to $53.6 million, and transaction processing transactions decreased 35% to $9.8 million, primarily reflecting the Exxon Mobil portfolio conversion to payment processing at the end of last year.

The average expenditure per payment processing transaction for Q3 increased 2% to $59.19 from $57.95 in Q3 of 2006.

The average retail sale price was $2.88 per gallon, just about level with the $2.87 per gallon recorded for the same period last year.

And finally, total MasterCard purchase volume grew 40%, from $366 million in Q3 last year to $511 million this year.

Looking at our results in detail, starting with the top line. Total revenue in the fleet segment of our business grew 9% from Q3 of last year to $81.4 million. Payment processing revenue in our fleet segment was up 12% to $61.2 million, from $54.8 million in Q3 last year, reflecting the Exxon Mobil private label business switching to payment processing.

Our net payment processing rate for Q3 was flat for the sequential quarter, and down 19 basis points from the third quarter a year ago. The year-on-year decline is due mainly to the Exxon Mobil conversion.

The MasterCard segment contributed $6.3 million in total revenue in Q3, compared with $4.8 million a year ago, which is an increase of 31%. The 40% increase in spend volume was driven largely by our single use account product. In addition, we are still seeing healthy growth rates from our traditional purchase card product as well.

Turning now to operating expenses. On a GAAP basis, the total for Q3 was $44.7 million. This compares to the $40.6 million in the third quarter last year. Higher operating interests, depreciation and amortization, and sellers' expense was partially offset by an improvement in credit loss.

Operating interest expense for the third quarter was up by $2.2 million from Q3 a year ago to $9.2 million. As in the past several quarters, the increase reflects higher interest rates and higher average debt levels. The higher average debt levels are attributable to the purchase of the Exxon Mobil portfolio and the increase in payment processing transactions.

The increase in the depreciation and amortization is primarily the result of new internally developed software placed in service, and the purchase of TelePoint in August. As you will see, on the reconciliation of adjusted net income to GAAP net income in the press release, we had approximately $400,000 of amortization this quarter related to that purchase.

Salary and other personnel costs were $16.2 million in the quarter, up about $1 million from last year. Our head count is up 21 people from last year to 692, primarily due to the purchase of TelePoint. We've also seen a shift in personnel towards our sales and marketing group, which has listed the average salary.

Credit loss improved this quarter compared to the prior year. On a total basis, including both fleet and MasterCard, credit loss was down by $1.7 million from Q3 last year to $3.3 million. As you may recall, we took a charge of $2.2 million in the prior year related to one specific customer, which was split roughly evenly between the fleet and MasterCard segments. And this accounts for the decrease.

Looking at our fleet segment, credit loss as a percentage of total payment processing expenditures was 10.6 basis points this quarter, compared with 12.5 basis points in Q3 last year. YTD, credit losses in the fleet segment are now 13.7 basis points. For the full year, we're continuing to predict loss rates near or slightly below the midpoint of our historical range of 11 to 22 basis points. We believe that we will see normal seasonal increases in the fourth quarter.

Our effective tax rate on a GAAP basis was 39.6% in Q3, compared with 35.8% a year ago. As you will see reflected on the income statement this quarter, we also made an adjustment to the basis of our deferred tax asset and the related liability to our former parent company. This increased both our tax expense and other income by approximately $1.7 million each. These adjustments represent a change in the company's estimated future tax rate. The actual change in the estimated tax rate is less than 0.2 of 1%.

Our adjusted net income tax rate this quarter was 39.4%, compared with 29.4% for Q3 last year, which included a one-time tax benefit. The adjusted net income tax rate, excluding the impacts from the changes in the deferred tax assets, would have been a little under 36% this quarter, and we expect it to remain near 37% into 2008.

Turning to our derivatives program. During the third quarter we recognized a realized loss of $5 million before taxes on these instruments, and an unrealized gain of $300,000. As a reminder, in '05 and '06 we effectively hedged 100% of our earnings exposure to changes in fuel prices, and in 2007 we have hedged approximately 90%. At this point, we have also completed hedging 90% of our anticipated earnings exposure through the second quarter of 2009.

The weighted average price range we've locked in for the fourth quarter of 2007 is $2.41 to $2.48 a gallon, compared with a high of $1.95 for 2006. The weighted average prices for 2008 are locked in between $2.54 and $2.60.

Due primarily to higher fuel prices at the end of the quarter, our accounts receivable balance net of reserve for credit loss, increased $300 million to $1.1 billion, compared with $802 million at December 31, 2006. Nearly all of this increase was offset by increases in our accounts payable and operating debt.

Our financing debt balance increased to approximately $207 million from $165 million at the end of the second quarter due to the purchase of TelePoint. We concluded Q3 with a leveraged ratio of approximately 1.6X.

We continue to target leverage between 1.5 and 2X, and will allocate our free cash flow to its best use, whether it's debt paydown, share buybacks, additional acquisitions, or additional internal reinvestments.

We continue to expect total capital expenditures to be in the range of $19 million to $21 million for the year, reflecting our continued reinvestment in our core product offerings and strategic diversification.

The new credit facility we put in place in the second quarter lowers our debt cost significantly and gives us additional flexibility to make further acquisitions or to repurchase shares. It's a $350 million line of credit with an option to increase it to $450 million. At our current debt levels, we will save approximately $1 million per year compared to the old facility.

Our access to working capital to fund our accounts receivable balances remains very high. For a period of time early in the quarter, we saw CD rates climb as much as 20 basis points and the competition for funds increase. However, as the credit market stabilized, the competition for funds decreased and rates dropped. As a result, there was very little impact on our business.

We continued executing on our share buyback program this quarter, repurchasing 274,000 shares at a total cost of approximately $10 million. This brings our cumulative total to a little less than 1 million shares purchased. We have approximately $45 million remaining in our authorization.

As Mike said, we've been working on the Citi contract for the past couple of quarters. I'd like to give you some sense of the financial impacts we anticipate.

We expect to see revenues from the agreement beginning in the third or fourth quarters of 2008, depending on the development and implementation time necessary. While it will contribute nicely to earnings, this agreement has a lower fee per transaction than our current average transaction processing customer, who are mainly small portfolios.

We also expect our adjusted net income margin to [decline] up to 1% when fully implemented.

I'll conclude with some major assumptions and our financial guidance for the fourth 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 and the amortization of purchased intangibles.

Although our share purchase program remains in place, we have not included any potential EPS upside from this. The fuel price assumptions are based on the applicable NYMEX futures price.

For the fourth quarter of 2007 we expect to report revenues in the range of $81 million to $86 million. This is based on an average retail fuel price of $2.74 per gallon.

For the full year of 2007 we are increasing our guidance. We now expect revenues ranging from $326 million to $331 million, based on an average retail fuel price of $2.76 per gallon.

As for earnings, for Q4 of 2007, we expect to report adjusted net income in the range of $18 million to $20 million, or $0.47 to $0.50 per diluted share.

For the full year of 2007, we're increasing our guidance. We now expect adjusted net income in the range of $76 million to $78 million, or $1.88 to $1.91 per diluted share on approximately 41 million shares outstanding.

With that, we'll be happy to take your questions. Katie, you can proceed with q-and-a now.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Paul Bartolai with Credit Suisse.

Thanks. Good morning. First question is on the Citi contract. First, Mike, I just wonder if you could give us any sense of what the competitive conditions were for this contract win, and what you think allowed you guys to win that. And then maybe Melissa, if you could just follow up with any more details on number of accounts or any other details around the contract that you're willing to give.

Be glad to. We have been working with Citi for some period of time. I think they recognize the high level of value we bring in terms of portfolio management when we manage things like overall customer satisfaction that equates to high activation rates, high retention rates on customers that we service through our other private label programs.

They also realize that we bring to bear our marketing and sales organization where we can help private label portfolios grow. So that is something they also realize was an advantage for Wright Express. So I think all of those things as well as our products, knowing we're bringing out additional products to diversify our business, which can equate even to small fleets and help them then diversify revenue streams for those fleets as well as lock those fleets in.

It was not any more than we negotiated with them on this. They were not out necessarily -- I mean, they looked at the market, they understood the market. But I think they realized, in terms of partnering, that Wright Express was somebody their private label partners, oil companies, respected, and somebody that Citi realized, over time, provided the best products and services in the industry.

So it's a long-term contract, we feel good about that. It gives us great opportunities next year to bring on two very large oil companies with the ability beyond 2008 to continue to bring on portfolios, and continue growth in the small fleet market, which has been a strategy for us.

And Mike talked earlier about the September 2007 issue Nilson report. If you've looked at the report, the two portfolios are roughly about 50 million transactions annually. We said that that would roll in into the latter part of next year, depending on the development and implementation time.

And just overall, it's a pretty large effort. We're going to be ramping up staff to compensate for this new contract, it's about 100 people that we'll be adding in order to service it. And I said earlier that the average fee is slightly less than our overall average now on a transaction processing fee, just because, again, of the magnitude of this account.

Will there be any meaningful costs ahead of the revenues ramping up?

Sure. There'll be some development required. And what we've experienced in the past is that will be a few million dollars of development in order to actually make any customization necessary for the customer.

Okay, great. And then, Mike, you mentioned the three of the ten that you'll have now. The obvious question is, you think there's opportunities for some of those other seven of the top ten? Is this a trend you're seeing towards some of these portfolios investigating whether they should look to someone like Wright Express to help them out?

Well, Citi has other portfolios, we're targeting two for next year. So there are opportunities to continue working with them to roll out some of the current portfolios they manage today on the consumer side in some of the fleet portfolios, as well as working together to solicit business where a private label oil company would want to have a consumer and a fleet car processor funding receivables. In that case, Citi's our partner, and we'll be the processor for them. So I think both with existing business there's opportunities, as well as new business.

In effect, we've now partnered with somebody who used to be a very large competitor of ours on the private label side, who is now aligned right next to us to transition business to us and hopefully work together to get new business.

Great. And then just one quick follow-up, Melissa. I just want to make sure I understand the tax issue. So was there no net benefit from the tax issue with Avis? You had that income you recognized, but that also had a higher tax adjustment as well, so no net impact?

It rounds out. The 15% is a pretty small amount, so essentially, it's a net zero.

The no net benefit was (inaudible). Okay, great. Thank you.

We'll go next to Pat Burton with Citi.

Hi. Congratulations on the quarter. My question relates to coming in to next year. Are there any big client renewals coming up at the beginning of 2008? And then I have a follow-up. Thanks.

Pat, at this time, we don't have -- we always are working with some of our partners, but there are no major client renewals that we're working on right now that I could speak of. We feel very comfortable with our strategic relationships going into next year, so we feel very solid there.

Okay. Thank you. And the follow-up is on the MasterCard purchase volume growth rate. Mike, what's behind that? Is that just getting more of these cards where you're the issuer into your client's hands? The 40% growth, what's driving that? Thanks.

We've got, first of all, nine salespeople dedicated to the MasterCard program, so we are growing a core business that's kind of looking at midsize and small businesses providing purchasing card and T&E solutions. Typically, a lot of that's underpenetrated, in some cases we win business from the competition.

We also have this single-use card product where it's used basically one time for different industries like the travel industry. But we see great expansion opportunities in the warranty business, where people buy extended warranties and these warranty companies basically want to be able to negotiate prices and then pay for those. They're using our MasterCard product to make the payments.

And I think we're just starting to touch the tip of the iceberg in terms of that marketplace, and we feel very good about that. And we're actually going to be adding three sales reps this year and additional sales reps next year.

Okay. And you guys get the interchange there. Correct?

Yes.

Thank you. Congratulations again. Great quarter.

We'll take our next question from Ahbi Gami with Banc of America.

Great. Thanks, and also my congratulations for great numbers. Could you talk a little bit about a couple of your newer product or service lines, your service and maintenance product and also your new Telematics offering. Has Telematics generated revenue yet, or are you still on track to generate revenue this quarter? Can you provide any sort of growth, or maybe specific numbers around your service and maintenance business?

On the Telematics side, we are generating business. We're seeing that people like to test, so they test a few units before they roll it out completely, so the adoption rate's a little slower than we'd like. But we feel very good about it.

We thought this was primarily a down market play, it is. But we're also seeing opportunities in the larger end of the market where we've got some of our larger fleets doing tests, and that has the ability to roll out a very large number of vehicles on the Telematics. So we feel very good about the product, the price points, so we're still very bullish on that product long-term.

On the service merchant side, we're starting to roll out some of that to our private label partners, which we had not been able to do in the past. Again, the growth is slow, but it's still double digit year-over-year, and we'll continue to see that growth.

But, as you know, Ahbi, it's on a small base, but we still continue to see it roll out. And I think as more of our private label's adopted we'll see better opportunities to grow it there as well.

That's great. Now that you have some revenue coming in from Telematics, can you talk a little bit about how the pricing model looks, how much of the revenue you're booking as just a pass-through or a markup on the technology, and how much you might be generating from fees or more high margin direct sort of revenue?

I think we're going to continue the stance that it's a contract that we have with one partner at this point, so it's not something we really want to disclose. And again, it's not material at this point, Ahbi.

Okay. One last question, then, back to Citi. Just to clarify in my mind, are you supporting a product that really competes with your core fuel solution? Because historically, you've mostly supported the oil company brand. Now you're supporting other card brand. Who owns the customer in this case?

Well, let's be clear. These are fleet card customers, business customers that use different commercial fleet card solutions. So they're buying gasoline. They're buying diesel fuel.

There will be a conversion, basically, to our processing system. There may be features that some of these oil companies have through Citi that we'll also have to accommodate for their customer base. But it's basically coming over to our system during the normal forms of transaction processing to capture level 3 data and then do all the back office support work.

So it looks much like a normal processing arrangement. Citi owns the receivable, so the fleets will be paying and they'll be sweeping their lockboxes but updating us for the AR so we can build the fleets and do everything we do on the back end. Does that help?

That helps. I think I'm going to dig a little bit deeper into it, but I appreciate the help. Thank you.

Our next question comes from Anurag Rana with KeyBanc.

Great quarter. During the initial remarks, you mentioned something about hiring more sales people. Could you please give us an idea as to what number are we looking for, for next year?

Well, I don't think we've disclosed for next year. We'll be looking at areas to grow. Clearly, we added this year, people on the Telematics product. As I've said, we've added three on MasterCard, we looked at at least three more there next year. We've added this year three on the heavy truck side of our business. So those are the primary areas where we've added this year.

And we'll continue to look at areas that are growing, and if we think the coverage models make sense, we'll continue to add sales reps. So we're not diluting the coverage models, but hopefully enhancing our capability to penetrate more of the space.

And the second question would be, if we were not to think about adding the new portfolio at this point, what would be the underlying transaction growth rate in your mind, given some of the weakness in the economy?

I would say that we're still seeing the softness, if you will, in this growth from our existing annuity business in October, so we factored that in for our guidance for the fourth quarter. I guess all we can do is then just watch it again in November and December and then decide what we have to do for next year's numbers, but we haven't forecasted that at this point.

Okay. Thank you.

We'll go next to Tien-Tsin Huang with JP Morgan.

Thanks. Melissa, did you quantify the EPS benefit from the positive mismatch on the hedge, relative to your expectations?

We didn't. We factored it into our guidance going forward, and so we just considered it to be a normal part of our business. So I haven't -- no, to answer your question directly.

Okay. So I guess going forward, are you adjusting based on the current run rate of what you're seeing in terms of the mismatch?

Yes. You can't predict out what's going to happen in the rest of the quarter, but based on what information we do know, we are including that in our guidance numbers. And that's what we did in the third quarter as well.

Okay. And then, given the comments around bankruptcies and delinquencies, should we assume an uptick in chargeoffs, going forward beyond 4Q?

Well, we've said in the past we see a seasonal increase in Q4, so that's not unusual. And we're still expecting to come in near the midpoint of our five year range on credit losses.

And if you look at the overall credit quality of our portfolio it really is quite strong, so I'd say that at this point we consider them to be just early indicators that we're watching, that they're very minor in terms of the size of the overall portfolio.

But considering everything that's going on in the broader economy, we're watching it. So I'd say we're a little cautious about next year, but we're not at a point where we're saying we think it's going to go up.

Okay. So I guess we'll kind of get one more quarter delinquencies and then sort of revisit where '08 could come out?

Yes. That is our view.

A couple of follow-up questions, real quick. On the MasterCard portfolio, you guys have reported some pretty strong results today. What percentage of your portfolio is coming from the single use account business? Because it sounds like that's really the differentiator here, beyond just penetrating the corporate. Any sense of how much of the contribution that is to the total portfolio?

Say, on the order of magnitude, about half. A little bit more than half.

Is there any competition in that, (inaudible) in that specific product?

Yes, there is.

Can you give us a sense of -- is it on the bank side, or are there any specific financial institutions that are going after that market?

Yes. It's mostly on the bank side, is what we see.

Last question, back to transportation. Any change in behavior from Comdata or FleetCor? Specifically, Comdata, given what's going on there.

No, still a strong competitor in the marketplace. As you know, both on the heavy truck side that we now participate in and as well as coming into the local, as they call it, or the smaller fleet business. But I can't see any differences.

Okay. Very good. Thank you.

We'll go next to Greg Smith with Merrill Lynch.

Hi. On the Citi deal, were those cards being processed on, or are they currently processed on an in-house system at Citi, or is First Data involved?

I think my understanding today is it's basically on an in-house program. I guess we don't know if they've done anything beyond that, we just know we've been working with them to move them over to our transaction processing system.

Okay. And then, clearly, it sounds like you do have some development that's going to have to go on. Is that something that's known today, you know exactly the kind of customization you're going to have to do, or is this stuff you're still going to find out over time? The question is, what's the risk involved, and could this get pushed out and delayed, potentially?

We have high level designs. We know the products that these private label portfolios offer to their fleets. So we've been able to do some GAAP analysis to say, okay, what additional features will we have to build. So at a high level, we do understand that.

We don't think there's going to be a lot of surprises, but until you get into it and understand some of the nuances, maybe some of the customization they have done to some extent, which typically for smaller fleet card portfolios is not that great.

So we think we have a good sense of it, knowing this is our business and knowing that they're competitors and we know their products and their services.

Okay. And then, I guess I'm just still -- and I apologize if you've already talked about this -- but it sounds like initially you have two large private label portfolios that are coming over. Is there more, or -- I guess I don't understand exactly what's coming over.

Yes. There are two that are targeted for '08. That's the initial focus, and that's what we're really building towards, as Melissa mentioned, also latter part of next year. They have some other portfolios that we'll then be working with them to work that into the plan for '09 to try to bring those over as well. So I think there's just opportunities to continue to grow with them with the portfolios they have.

But those others, are you contractually mandated to get those, or is this something you still have to prove yourself or even compete with somebody else for?

I think we'll just be working with Citi to go in to talk to their partners, to talk about bringing those over. I think there would be great receptivity on that, but the only two we have right now locked in are the two we're talking about for next year.

Okay, great. And then just one other question. What was your head count at quarter end?

It was 676.

676. And then you're going to add about 100 related to Citi specifically?

Yes. We said that it would be approximately 100, it might be a little bit more than that.

Okay, great. Nice quarter, and congratulations on the Citi deal, guys.

Thank you.

We'll go next to Robert Dodd with Morgan Keegan.

Hi, guys. Sticking with the theme of Citi. On the pricing side, is the per-transaction pricing going to be comparable to what you had with the Exxon deal, which obviously, switched off a little while ago?

Well, I think we can't comment on a specific customer's pricing, so that's probably a little bit too specific a question. It's definitely higher than the average and more along the size of an Exxon Mobil contract than the average.

It's lower than the average.

I got the lower point, yes. On the marketing side, both of the portfolios shrank the number of transactions in '06, the latest data I've seen. Now, they did slightly better than the industry in that department, but what's your marketing plan there? Have you got anything that's drawn up so far, and what's your level of confidence that you can turn those shrinking transaction numbers to growing transaction numbers?

Well, all we've done so far, since this has just been signed, is there's already been preliminary work done with the oils, with Citi and us in the room talking about opportunities to grow their portfolios, bringing to bear some of the things we feel we can either add directly or indirectly on sales performance and training, sales coverage, marketing programs, as well as some of the products that we have brought into the marketplace that can help enhance their overall offer to the fleets.

So I think it's those sort of opportunities, as well as they know that we drive high levels of activation rates and high retention rates. You can see it in our numbers talking about less than a 2% voluntary attrition. They know that, they see that, they hear that, and I think those are the reasons why they believe that the overall customer satisfaction we can bring to bear on their portfolios would hopefully stem that tide and then allow us to grow the portfolios.

Okay, great. And one final question, if I can. On the head count, are you taking Citi people over to your employees, or you're going to have to go out and find these extra 100 people? And when can we expect that head count to start transitioning on?

We really are not going to comment on that at this point.

Okay. Thank you.

We'll take our next question from Michael Weisberg with ING.

Hi, everyone. A few things, if I could. Melissa, adding 100 people initially on the Citibank contract, I would guess annualized, that's certainly $5 million to $10 million of expenses. Is that going to be expensed as you go through '08? Because I presume that would be a net earnings drag in '08, no?

Well, we're going to try to time the hiring as close to the actual conversion as possible, both to the people that are going to be there to service the portfolio once it's up and running. So I wouldn't think of it -- there might be a slight drag right before the implementation. I mean, certainly, we'll have a cost that will be capitalized as we work through the development, but it will be minimized to the extent possible.

Okay. So there could be some -- so the startup costs would be small, and to the extent you realize them, they'll be amortized. Is that right?

The startup costs that are directly expensed would be minimal, and I'm not saying that there won't be any, but it certainly isn't on the order of $5 million. It's going to be maybe a couple of months, at the most, of costs.

And then, on top of that, there'll be an amount -- a cost that we have to develop the program, which will be amortized over the life of the contract.

Got it. So you'll amortize the development costs.

Yes.

Great. Correct me if I have this wrong, but in the small fleet business, your private label business was, I thought, flat the second quarter year-to-year, and it's down 12% third quarter. Did I get that right?

No. We talked about that it was still down year-over-year every quarter this year, just that we were talking on a sequential basis we had started to see it flatten out. And that's pretty much what we saw in the third quarter as well. But year-over-year, or third quarter over third quarter, it was down.

It was down third quarter but it's starting to flatten out, because the UPS loss is now off, right, because that happened in May '06. Didn't it?

That's correct.

Okay. And the direct business looks like it accelerated, is that right, versus the second quarter on the year-to-year basis?

We're looking at some numbers to make sure we're answering that correctly.

Because I thought the overall fleet business year-to-year, counting the two, was -5 year-to-year third quarter versus -4 year-to-year second quarter?

Yes. It's approximately the same, if you look at them.

Okay. And UPS, which hurt the compare in the second quarter isn't there in the third quarter.

That's true.

So presumably, something got slightly worse.

Yes, and I talked about that in the fact that we have seen a slowdown in the overall current accounts, our annuity base. So because of the economy and the impact of a number of different SIC codes that we service, we actually, year-over-year typically have seen growth from our annuity, our existing customer base. And this year it's actually slightly declining on a transaction basis. So that's where you're seeing the impact. Where we've seen the growth in the past couple of years we are not seeing it this year with the existing customer base.

You know, this happened I guess a year ago, when business slowed. I would have thought you'd see it in the number of vehicles, because you'd think if business is slow, you take a truck off its route. But yet, you didn't really see that, which is surprising, I thought.

Yes, we've seen a couple of things. We've seen the average transaction per active vehicle slightly decrease. But just overall, we're just not seeing people growing their business overall. So the growth is really coming from new business, we're not seeing it from the existing business.

Yes, because you said the existing business is actually down slightly on an organic basis, versus usually growing slightly.

That's right.

It looks like revs per transactions were up about 2% ex-gas. I know that moves around, but are you doing things to where we think that that kind of number is a sustainable number?

We've seen the growth as we've added more heavy truck business (inaudible) larger business. So it's been fairly sustainable. It moved around a little bit, but you've seen around that 2% growth rate relatively consistently.

And Melissa, did you say the Citibank contract would reduce total net margins by one percentage point?

Yes, we said a little bit less than one. Yes.

A little one. Okay. Because the revenue impact from that is not going to be that big, right? It's all going to be transaction revenues.

It is, but as we said before [we're] to annualize it in. There's about 50 million transactions reported in the Nilson report associated with the base. So it's still a pretty sizable deal.

Absolutely. Did you say it would be additive in '08?

I said it would be additive in '08 depending on the implementation timeframe. Right now we're anticipating it to be either Q3 or Q4.

Okay. I guess that means it would be much more significantly additive in '09 then, if I understand how it would work.

Yes. Because you'd have a full year.

Right. And less start up expenses, et cetera.

Yes.

That sounds great. Thanks a lot. Good job.

Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And it appears we have no further questions, so that does appear that we have ended the q-and-a session.

At this time, I would now like to turn the conference back over to you, Mr. Mike Dubyak, for any additional or closing remarks.

Thank you, Katie. And thanks everyone for listening. We look forward to speaking with you again next quarter. This concludes our call. Thank you.

Thank you. We do appreciate your participation on today's conference call. You may disconnect at this time.