WEX Inc (WEX) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the Wright Express Corporation's fourth quarter 2007 financial results conference call. As a reminder, today's call is being recorded. There will be an opportunity for questions and comments after the prepared remarks.

And I would now 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 financial results press release we issued earlier this morning is posted in 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 also issued a press release this morning regarding the acquisition of the assets of Pacific Pride Services, which Mike will be discussing in a few minutes, and that release is posted on our website as well. We'll be discussing a non-GAAP metric specifically adjusted net income during this call. Please see exhibit one included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income.

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 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 in 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. Looking across all of the parts of the business, we closed 2007 with a good fourth quarter and the business is performing well as the new year begins. It was in the fourth quarter a year ago that we began seeing the impact of a softening economy. But our financial results in the 12 months since then and the milestones we achieved in 2007 demonstrate two important points.

Number one, our business model gives us the ability to consistently deliver shareholder value in the short term and number two, we've been successful at the same time in creating new products and pursuing alliances and acquisitions with the potential to diversify our business and generate greater value for the long-term. In terms of our ability to benefit when economic trends start strengthening, I think we're in a better position than we were when 2007 began. Looking at the fourth quarter highlights, adjusted net income was on the high side of our guidance. The majority of our revenue drivers came in where we expected including the number of transactions process and transactions per active vehicle. Total fuel transaction volume increased 7% from the fourth quarter of '06 to $63.1 million transactions. This was hard-earned growth because the annuity side of our business was just as soft this past quarter as it was in the fourth quarter a year ago, albeit for different reasons.

The growth we enjoyed came from our front end and from very low attrition. The fourth quarter concluded a year in which our overall attrition rate improved to 4.7%, the lowest in seven years. Involuntary attrition was down partly because of the large account cleanups we completed in 2006. Voluntary attrition was a very low 2.3%. I believe this is attributable to our high level of customer satisfaction, which demonstrates the value of strong service in outstanding products as things are truly differentiate Wright Express. This was also a good quarter and a good year in terms of fleet credit loss. We have consistently forecasted losses for 2007 at the midpoint of our historical range and that's where they came in. Melissa will have more to say on this topic in a few minutes.

With respect to the front end, we saw a solid performance in our direct and co-brand channels. This translated into another quarter of growth in the mid-size and large fleet markets. The number of vehicles in this category increased 5% from the fourth quarter last year. This was also another good quarter in our heavy truck business where the vehicle count was up 13% from Q4 last year. In small fleets, the number of vehicles overall was basically flat this quarter compared to Q3 and down 3% from the fourth quarter of 2006. As in the past few quarters, growth in the Wright Express direct channel where average vehicles grew 10% year on year was offset by private label where small fleet vehicles were down 8%. We're still seeing the impact of the cleanup of cards that occurred in '06 but private label transaction volume during the fourth quarter was essentially flat sequentially. A key focus for our long-term growth potential is in small fleets, so executing on our strategy for this market is key. In the direct channel, we need to deliver on our reputation as the premiere fleet product. In private label, we need to reinforce our position as the best outsourcing partner for players like the big oil companies and card issuers who want to see their fleet portfolios grow.

If you look back at the fourth quarter and the year in the small fleet market, our new relationship with Citi was the most significant milestone. It will take more time for the Citi relationship to generate small fleet growth, but everything we're seeing in the integration and product development tells us that we're moving in the right direction. We have a dedicated team in place to gear up for the Citi conversion effort, which we expect to roll out in the latter part of this year depending upon the development and implementation time. Citi clearly recognizes the high level of value we bring in terms of portfolio management. Our ability to deliver high activation rates, high customer satisfaction, and high retention. They also recognize that partnering with our marketing and sales organization will help their private label portfolios grow and diversify their revenue streams. In the distributor channel where roughly 2/3 of America's 150,000 retail gas stations are controlled, we're making three kinds of growth investments.

First and with good results is a focus on branded distributors. For example, during the fourth quarter, we renewed a five-year contract with one of our key partners, Sinclair. It calls for Wright Express to continue delivering a new set of fleet management tools to Sinclair branded distributors. Number two is our direct distributor program where we're soliciting multi-branded or private brand distributors to market their own fleet cards on our program. We have a direct offering for distributors, a product that will continue to enhance going forward. Strategy three is illustrated by the announcement we made this morning. The Wex Universal Fleet Card has been accepted at Pacific Pride franchise locations for the past three years, and on prior calls, I've discussed the new distributor program we've been developing with Pacific Pride. I'm very pleased to be able to say that after making a significant investment to enhance their product offering, we will be taking this relationship to the next level. We have signed a definitive agreement to acquire Pacific Pride for about $32 million in cash which we intend to finance through our existing credit facility. Pacific Pride is a profitable business that generates approximately 80% of its revenue from transaction fees and revenues for 2008 are forecasted to be approximately $7 million. We expect the acquisition to be accretive to our non-GAAP earnings in the first 12 months of combined operations and to have no impact on our margins. We anticipate closing the transaction by the end of the first quarter of 2008 and we expect Pacific Pride to be accretive on both a GAAP and non-GAAP basis in 2009.

Pacific Pride has a compelling value proposition for distributors and the fleets they serve making it a strategic fit for us. For franchise distributors, Pacific Pride offers exclusivity in an outstanding fleet management product set. At the same time, in the same way that MasterCard or Visa functions at the association level for banks, Pacific Pride serves as a network clearing house that effectively expands each distributor's geographic footprint by giving them access to each other's sites. For fleets Pacific Pride's value proposition is the same as ours. Strong purchase controls, exceptional security, and outstanding reporting capabilities. Their platform and product set which we've now enhanced give us immediate access to a broader universe of local field marketers and enhanced pricing and settlement capabilities. Our ability to offer this comprehensive value proposition should strengthen our relationship with distributors and small fleets they serve, accelerating our strategic initiatives in these key markets.

Pacific Pride is a company with an outstanding reputation, management, and employee team, and we look forward to welcoming them into the Wright Express family. The over 330 independent fuel distributors in Pacific Pride's franchise network also represent across selling opportunity for a new Telepoint business. Every Pacific Pride franchise manages fuel storage tanks at their retail and bulk sites. And the telepoint product is a web-based solution for fuel inventory management that has always been focused on the distributor market. By way of background, adding telepoint made strategic sense to us because we service a number of oil companies with retail and wholesale sites that require inventory management services. We can leverage these existing relationships and now with our distributor strategy and the acquisition of Pacific pride, we will be able to create great synergy and offer more value to oil companies of all sizes. Telepoint's pipeline is growing just as we planned. Once the Pacific Pride acquisition closes, our next key objective is to have the Telepoint Wright Express and Pacific Pride sales groups work together more closely to capitalize on both direct and cross selling opportunities.

WEXSmart, our telematics initiative, is also going well. We're seeing the growth accelerate consistently from month-to-month, even though customers are taking the time to test a few sample units before they commit to a full roll-out. This quarter, the convenience store oil company sheets has signed on as the first private label marketer to offer our telematics product to their fleets. Our MasterCard business remains very strong. Purchase volume grew 45% from Q4 last year to roughly $484 million. And as we saw through the year, MasterCard growth in Q4 was driven by strong demand for two key products, our purchasing and single use account cards. The purchasing card has been very well received in the underserved midsized to small business market. The single use or as we call it ghost account product is mainly used in the on-line travel industry and more recently in the vehicle warranty business. We're in the early stages of tapping this part of the market and the potential looks very promising.

We've added three new reps to our MasterCard sales group this year and we're looking forward to them reaching full productivity within the next couple of quarters. In many respects, MasterCard is a model for future organic growth in our business. In developing MasterCard, we leveraged our ability to provide customers with meaningful information on the transaction and applied it to different kinds of purchasing activity. We're leveraging the same model in pursuing new business in the construction vertical. As with telematics, developing the right mix of web based functionality will take some time. This is in large part because at the point of sale, the data capture information needs in construction are very different from fueling at the pump. Contractors spend for building materials and supplies is a $400 billion market. More than twice as large as the fleet market we currently serve. So, the opportunity is significant. We recently signed our first major partnership focused on the construction vertical, a branded program for bobcat, the construction equipment company. Bobcat is an ideal long-term strategic partner for us in this attractive vertical market because of their outstanding product and brand and we look forward to providing them with a world-class set of services that enhance their success in meeting the needs of their customers. In closing, our performance in the fourth quarter and through the year demonstrates that we have a strong, resilient business model and a great reputation for delivering value to our customers. In a soft economy, we've capitalized on these assets and supplemented slower growth in our fleet business with solid contributions from MasterCard and other new ventures like TelePoint.

We will continue to work toward our goals of capturing a larger share of total fleet and corporate spend. Diversifying our source of revenue and pursuing opportunities for alliances, messengers, or acquisitions that can accelerate our growth and/or enhance our strategic position. With that, I'll now turn the call over to our CFO, Melissa Smith.

Good morning, everyone. We're very pleased that once again earnings for the fourth quarter were in line with our expectations. In addition, we exceeded the top end of our revenue guidance primarily due to the price of fuel which was $0.32 higher than projected. In a period of economic uncertainty, our business continued to grow and generate predictable operating results. As Mike mentioned, general economic conditions are having an effect on vehicle growth in our existing customer base.

However, thanks to the success on the front end and our low attrition numbers, we were able to grow total transactions 7% from the prior year in Q4 and 4% for the full year. We also performed well in terms of credit quality. Our loss rate for the fourth quarter was flat with Q4 last year at 23.2 basis points. This brings the full year to 16.3 basis points of loss for our fleet business, which is approximately the mid-point of our losses from 2001 through 2006. This is consistent with the guidance we provided throughout the past year. I'll talk at length about credit quality in a moment.

First, let's focus on the operating results for the quarter. Total revenue for the fourth quarter of 2007 increased 28% to $90.7 million from $70.8 million for the fourth quarter of 2006. Net income to common shareholders on a GAAP basis was $4.6 million or $0.11 per diluted share. This compares with $19 million or $0.46 per diluted share for Q4 last year. The company's adjusted net income to the fourth quarter of 2007 increased 46% from last year to $19.7 million or $0.49 per diluted share. This non-GAAP figure excludes an unrealized market-to-market loss under derivative instruments as well as the amortization of purchased intangibles. Adjusted net income for the fourth quarter last year was $13.4 million or $0.33 per share. For full year 2007, net income to common shareholders on a GAAP basis was $51.6 million or $1.27 per diluted share. This compares with $74.6 million or $1.81 per diluted share for 2006. Again, for the full year, adjusted net income grew from $55.8 million or $1.36 per diluted share in 2006 to $76 million or $1.86 per diluted share in 2007, an increase of 36%.

Let's discuss revenue growth in our fleet in MasterCard segments. The average number of vehicles serviced was approximately $4.5 million compared with approximately $4.4 million a year ago. Total revenue in the fleet segment of our business grew 31% from Q4 of last year, to $84.9 million. Payment processing revenue in our fleet segment was up 37% to $64 million from $46.6 million in Q4 last year reflecting the ExxonMobile Private Label business switching to payment processing in Q1. The number of payment processing transactions increased 18% to $53.4 million and transaction processing transactions decreased 31% to $9.7 million. The total number of transaction process this quarter increased 7% to $63.1 million from $59.2 million from the fourth quarter last year. Our net payment processing rate for Q4 was down two basis points from the sequential quarter and down 18 basis points from the fourth quarter a year ago. The year on year decline is due mainly to the ExxonMobile conversion combined with higher fuel prices. The average retail fuel price was $3.06 per gallon increasing 29% from $2.37 per gallon recorded for the same period last year. The average spend per transaction tracked the increase in the price of fuel.

The MasterCard segment contributed $5.7 million in total revenue in Q4 compared with $6.1 million a year ago, which is a decrease of 6%. This decrease was due primarily to the sale of MasterCard stock for $1.6 million in Q4 last year. Excluding this, the increase would have been 27%. This growth is driven largely by MasterCard purchase volume, which increased 45% from $333 million in Q4 last year to $484 million this quarter. As Mike mentioned, we've been able to drive continued MasterCard growth in large part by selling our product into new markets. Increased spend has been partially offset by declining net interchange rates as some of our larger customers hit higher rebate tiers. Turning now to operating expenses, on a GAAP basis, the total for Q4 was $51.1 million. This compares with $42.2 million in the fourth quarter last year. The increase reflects a combination of higher salaries expense, operating interest, depreciation and amortization and credit losses.

Since credit quality is a topic that's on everyone's mind today, we want to spend a moment discussing this more specifically. The credit we extend to fleet is not revolving credit. These customers pay us in 30 days in the same way these businesses pay most of their other suppliers. The number of days it takes on average to pay Wright Express has remained consistent over a period of many years and continues to remain consistent today. We have traditionally experienced higher losses in the first and fourth quarters. This pattern held constant in the fourth quarter of 2007 and we expect it to occur again in the first quarter of 2008. Looking at 2008 as a whole, we're projecting our losses to move closer to the high end of our historical range. We've been seeing an increase in customer bankruptcies, coupled with larger losses per customer, and we expect these trends to continue. While we cannot totally limit our exposure to losses in a period of economic decline, we do have a history of continued customer payment and economic downturns. Our product is integral to our customer's businesses and our payment trends reflect the overall economic value our customers are receiving. On a total basis including both fleet and MasterCard, credit loss in the fourth quarter was up $2.5 million from Q4 last year to $8 million.

However, losses on the fleet segment were similar to Q4 last year at 23.2 basis points of losses as a percentage of payment processing expenditures. Operating interest in expense for the fourth quarter was up by $3.2 million from Q4 a year ago to $9.1 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 ExxonMobile portfolio, fuel prices, and the increase in payment process in the transactions. Going forward, we anticipate benefiting from the recent interest rate cuts. Since the end of the year, quoted CD rates have declined about 1% cover. It will take some time to work into our certificate of deposit base. About half of the current CD balances will roll off and be refinanced in the first six months of the year. As this happens, the advantage we receive from the reduced rates should more than offset the increases we anticipate in elevated credit losses. The increase in depreciation and amortization for the fourth quarter is primarily the result of the new internally developed Software placement service and the purchase of TelePoint in August. We expect appreciation to continue increasing moderately, reflecting our recent increase in capital investment.

As we will see on the reconciliation of adjusted net income to GAAP net income in the press release, they have approximately $681,000 of amortization this quarter relating to that purchase. Salary and other personnel costs were $17 million in the quarter, up $1.7 million from last year. The increase is primarily related to two areas. Stock-related compensation and a separation agreement with the former executive. 2008 is the last year we expect to see a significant increase in annual stock compensation as we reach the fourth year of our ALTIP program. Our head count is up 12 people from the last year to 692 primarily due to the purchase of Telepoint. We've seen a shift in personnel toward our sales and marketing group which has lifted the average salary. Let me take this opportunity to get into detail around the adjustments we made to our second quarter results to reflect a change in the state of Maine tax law. The new law was enacted in June of 2007 and effectively reduced the company's taxable income and loss a portion to the state of Maine. This resulted in decreases in the amount of the company's net deferred tax assets, the related contractual liability to Avis Budget Group, and the company's blended state income tax rate. This correction resulted in a roughly $2 million non-cash charge to the company's previously issued financial statements for the June quarter. While the correction also affected our six and nine-month results for the periods ending September 30 of 2007 by the same amounts, our results for the third quarter were not materially affected.

Returning to our Q4 results, our effective tax rate on a GAAP basis was 39.1% for the quarter, compared with 38.4% for Q4 a year ago. Our adjusted net income tax rate this quarter was 36.7% compared with 35.2% for Q4 last year. We expect the adjusted net income tax rate to increase about a half of percent next year due to an increase in non-deductible stock compensation expense. Turning to our derivatives program during the fourth quarter, we recognized and realized loss of $5.8 million before taxes on these instruments and in unrealized loss of $22.8 million. As a reminder, in '05 and '06, we effectively hedged 100% of our earnings exposures to changes in fuel prices and in 2007 and 2008, we have hedged approximately 90%. At this point, we've also completed hedging 90% of our anticipated earnings exposure through the second quarter of 2009. The weighted average price we've locked in for the first quarter of 2008 is $2.53 to $2.60 a gallon, compared with a high of $2.48 for 2007. The weighted average prices for 2008 are lock 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 reserves for credit loss was $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 declined $7 million from approximately $207 million at the end of the third quarter to approximately $200 million in Q4. We concluded Q4 with a leverage ratio of approximately 1.4 times which is below our targeted range. On a pro forma basis, assuming the acquisition of Pacific Pride at December 31, our leverage ratio would have been 1.6. We continue to target leverage between 1.5 in two times and will allocate our free cash flow to its best use with its debt pay down, share buy back, additional acquisitions, or additional internal reinvestment.

Capital expenditures were $19.5 million for the full year 2007 reflecting our continued reinvestment on our core product offerings and strategic diversification. We expect our level investment to ramp in 2008, reflecting the work required for the city conversion. We anticipate total Cap-Ex to be between 24 and $27 million in 2008. We continued executing on our share buyback program this quarter, repurchasing 168,000 shares at a total cost of approximately $6.1 million. This brings the cumulative total purchase since our board authorization in February of 2007 to 1.2 million shares or approximately $38 million. I'll conclude with some major assumptions and our financial guidance for the first quarter and full year 2008. Let me remind you that our forecast for these periods are valid only as of today and are remained on a non-GAAP basis to disclose the impact of non-cash, market-to-market adjustments on the company's fuel price related derivative instruments and the amortization of purchased intangibles.

Although our share repurchase program remains in place, we've not included any potential EPS outside from this. The fuel price assumptions are based on the applicable NYMEX futures price. In addition, our annual guidance includes the impact of the Pacific Pride acquisition. For the first quarter of 2008, we expect to report revenues in the range of 87 to $92 million. This is based on an average retail fuel price of $3.13 per gallon. To the full year 2008, we expect revenues ranging from 383 to $393 million based on an average retail fuel price of $3.06 per gallon. As for earnings, for Q1 of 2008, we expect the report adjusted net income in the range of $17 to $18 million or $0.42 to $0.45 cents per diluted share. For the full year 2008, we expect adjusted net income in the range of 86 to $90 million or $2.11 to $2.21 per diluted share on approximately $41 million shares outstanding. With that, we will be happy to take your questions. Andrea, you can proceed with Q&A now.

Great. Thank you so much. Ladies and gentlemen, if you would like to ask a question, please do so. (OPERATOR INSTRUCTIONS) We'll pause for just a moment. And our first question today will come from Anurag Rana with KeyBanc Capital Markets.

Hi. Good morning, everyone. Would it be possible for you to give us some idea as to when economic downturns, what kind of transaction processing growth should we be looking at and also, you know, could you please remind us also about the range of credit losses that historically you have seen in such an environment?

Well, the transaction side as you know, Anurag, we had started to see the slowdown last year. A little bit more pronounced in the third quarter which continued into the fourth quarter. So, we are projecting that to basically be similar to our kind of core growth all through 2008. So, we're seeing that annuity slow down and at this point, we're not expecting that to pick up during any of 2008. We started to see it before other sectors were talking about slowdown and so far, it's holding steady and we're keeping at that level.

In relating to bad debt, our losses in the last several years have been between 11 and 22 basis points which includes one in the last ten years, the high point has been 24 basis points.

Okay. Thank you. And just once more. Could you give us some idea about the financial impact of the acquisition that was done today in terms of transaction growth?

Pacific Pride process is about 32 million transactions, and I think Mike said earlier that about 80% of the revenue comes from transaction-related fees.

Okay. Thank you.

And our next question will come from Ahbi Gami with Bank of America.

Hi, thanks. Nice quarter. Nice underlying metrics. A few questions. On that Pac Pride on your last comment, Melissa, doing the math on that, it looks like the Pac Pride would had around $0.02 to annual EPS on a non-GAAP basis. Does that math sound about right?

What we said is it actually is just slightly accretive on a non-GAAP basis to our current year results. And it will be accretive both on non-GAAP and GAAP basis in '09.

How fast has Pac Pride been growing?

They have- - it has been just a steady growing business because their product set has not changed that much over the years. What we've been building is the ability to provide more services to their distributors in terms of on-line products, settlement capabilities, all the way out to funding receivables. So those are some of the things we'll be putting in place over time to accelerate in effect the growth rate on revenues but also allow them to reach out and sign up more distributors to their programs with some of the new products.

Right. Your guidance, however, your commentary regarding accretion, does that take into account some of the new programs providing revenue upside or is that primarily from benefits from the existing products and some cost takeout?

We are expecting to see significant growth in '08. It is really more into '09 as we continue to roll out the product functionality to their customer base.

Great. On Pac Pride also, do you have a plan to expand them more nationally, a number of state especially in the northeast that they don't currently cover?

Yes. We think with some of the new product sets, it gives them more appeal in the market place, so clearly we're going to look to try to drive more franchise sales on their program. I mean, it should be a natural for us with some of the enhancements we're doing in terms of product offerings.

Ok, great. One more quick question then I'll come back later. On the credit provisions for '08, in the fourth quarter, it looks like there was a higher level of net chargeoffs versus kind of trend line. Does that mean based on your calculations or what your methodology that by mid '08 we should potentially be seeing slightly higher than normal provision levels?

Yes. We've seen slightly higher but moderately higher chargeoffs over the last couple of months that have been led in large part by an increase in the size and the number of bankruptcies. And so that's something that we're projecting into our first quarter estimates. So, if you look back in '07, we talk about seeing some seasonality typically anyway. We had 23 basis points of loss in the first quarter of '07 on 16, a little over 16 for the full year. But we think we're going to see kind of a similar trend in '08.

Okay, great. And just quickly then, do you also have the data points on your cost of funds for your CEs and your interest on deposits for the quarter?

For the fourth quarter of '07, I presume you're asking?

Yes, the fourth quarter.

The all in and blended rate was about little under 6%.

Do you have the exact rate by any chance?

I've got 5.9%. That's all in including fees.

Okay. Got it. Great. Okay, thanks. I'll come back with more later.

We will hear next from Tien-Tsin Huang with J.P. Morgan.

Hey, guys. It is actually [Reggie] filling in for Tien-Tsin. I got quick question on Q1 guidance. It was down sequentially from Q4. I'm just wondering if that's the Citi ramp-up or kind of what's driving the sequential step down in Q1 earnings. Thanks.

Sure. It is impacted by the credit loss that we're anticipating and again, it is a similar trend to what we had in 2007. The first quarter of '07, our actual results were roughly 20% of the full year results. That's roughly what we're projecting right now, too. You're seeing that being driven down in part by our estimation of credit loss.

Got you. As far as telematics, can we get an update on how that's progressing and how you're seeing the economics kind of work out there as far as revenues per month and any other details you can provide and that would be great.

Yes, it is still a small program in terms of revenue. I think what we are seeing is very strong response rates to our mailers. We're seeing people signing up but they're testing. I think some of the trends we're now seeing is that they're re-upping. So, after they test, they do come back and then order additional units. We are growing basically as we talked about over the last year, we're seeing the growth increase. We're seeing good response although we have no sales yet but seeing good response even with some of our larger fleets. And we were glad to see that sheets who is a great marketer signing up as a private label now to market the program. So, we know the product is ready for the price points and the functionality for our market. It is just that it is probably going to roll out slower than we thought, but we still feel very good about the trends.

Okay. And then on the funding cost side, can we get I guess some type of range that you guys are assuming for funding costs in '08?

We've built in the recent rate cuts into our estimates for the year. And so we're just rolling them in as we're projecting the CD balances to roll off. I said before that about half the portfolio would roll off in the first six months. And the weighted average actually at the end of January was about eight months remaining on the CD balances if that helps.

And then I guess finally, any color you can provide for geographical weakness where you might be seeing slower growth or anything that you might want to add there.

Yeah, we haven't seen any geographic anomalies if you will in terms of certain areas being slower than others at this point.

All right. Thank you.

(Operator's Instruction) We'll go next to David Parker with Merrill Lynch.

Good morning, everyone. I think in your comments, you talked about the annuity side of the business being soft and you mentioned that it was for different reasons than beforehand. Can you provide a little more color on that, please?

Yeah, when we saw the slowdown in the fourth quarter of '06, what we really saw then was utilization of vehicles so we tracked transactions per active vehicle and we saw that down. What we saw happening though throughout the year was there was some recovery on that but then we started to see a slowdown in the growth of our annuity business which typically would grow in the range of 3% to 5%- - 3% to 4% to 5% based on GDP on their transaction growth. Just adding new business and growing their business. We started to see that come off as the year progressed and by the fourth quarter, the transactions per active card were somewhat back to normal but the other really kept going down and that was the growth of transactions, the growth of vehicles with the annuity or the existing business. So, that's what we started to see the economy impact differently. They started to poll and utilize the current vehicles more but were not expanding their business because of the economic slowdown.

Okay, great. That's very helpful. And then with Pacific Pride, can you just talk about the integration plans? Is it sounds like you're going to leave them relatively alone and not going to be cutting costs. I mean, are those your general plans for Pacific Pride?

Well, to some extent, yes, because it is not a large group and they're kind of running a different type of business. A lot of the integration to some extent has been already invested in terms of the back end products and services, the enhancements we have been working with on to build and roll out over the next year. So, the good news is that as we do that, more and more of their transactions starts to reside on our platform. So, the rest of what they do in Portland, Oregon or Salem, Oregon will pretty much stay intact. There will be some integration naturally of benefits and things like that, but not much else in terms of cost synergies.

Okay. And then in terms of the '08 guidance, is Pacific Pride included or excluded from that guidance?

It is included.

Okay. Thank you.

Assuming that it closes within the first quarter.

Okay. And then just final question. You're pursuing the construction vertical. You signed the agreement with Bobcat. What are some other adjacent verticals to the fleet market that you might look at better or similar to the construction vertical as well.

Yeah, I would say right now, that's the one we're focusing on. We think we have enough to build into that market place which I said is huge of $400 billion market that has a lot of different merchants embedded within that market. So, I think that's where our focus at least for verticals is for the next number of years I think we'll be focusing on that market.

Okay. Great. Thank you.

Thank you, and our next question will come from [Ben Cadwick] with First Investors.

Hi, how are you. Nice quarter. When I look at your guidance for 2008, can you kind of walk us through maybe the timing of your investments in the Citi contract and how operating margins should look going throughout the year as maybe revenue ramps and we get some leverage on operating line?

The Citi contract as Mike said in his comments were heavily dependent on a joint team working with Citi on the timing of when that's actually going to occur. Right now, we said the latter part of the year. So, be toward the very end of the year. In advance of that, we need to ramp up our resources so roughly six weeks to eight weeks in advance we'll be adding about 100 people in order to deal with that contract. The other things we've said is that it is lower than their average transaction processing fee, given the size of the relationship. And it will decrease our operating margins once you roll it in, assuming the price of gas is neutral, about 1%.

Okay. If I think of your EPS guidance for '08, I mean could you as possible to quantify what kind of sort of short term negative impact that would have in '08 and how we should look at maybe '09 as a positive, is there a way to frame that?

The biggest way- - the biggest impact that is going to have is on our capital numbers for 2008. I would say that's the largest impact when you look at it particularly on an earnings basis. There will be a little bit of dilution on an earnings basis depending on the timing of when that comes in, but only anticipate it being material.

Okay. So, again, if I look at your- - the range of your earnings guidance is, I don't know if conservatism is the right word to use but is that conservative based more on your questions about the health of the credit market or how much of your- - of that is built into the sort of Citi ramp?

There is a lot of uncertainty right now i think it's particularly around what's happening overall with the economy. As Mike said earlier, we're anticipating when we put together our guidance that we're going to see a pretty similar year as far as growth as we did in '07 excluding the impact of Citi. And then on top of that, we do anticipate to see elevated losses in a benefit of interest rates, so we've reflected all of that in there but there is a lot of unknowns still as we go into the year.

Okay. Okay, thank you.

We'll hear next from Robert Dodd with Morgan Keegan.

Hi, guys. It is actually Michael Shepherd in for Robert. Just one quick question, we have on the construction vertical you guys are talking about, are you guys going to be taking on the credit risk with that business or how is that going to work? Thanks.

Yes. We will be taking on the credit risk with that business. So, we will provide funded programs as we do to other partners and even the initial program with bobcat we take on the credit risk. We also have built which I think is starting to differentiate us a strong front end credit model which is very different than our fleet credit model to make sure it helps us manage and maintain a good portfolio management on that program.

The customer base that we also know well. It is a different mechanism that we're using to service them but a piece of our business now is related to contractors. So, we do have really quite good experience in dealing with that segment of the business.

Great. Thank you.

(Operator's Instruction) And we'll take a follow-up question from Mr. Gami.

Okay, thanks. There $1.9 million on the cash flow statement related to purchase of receivables. Can you just describe what that was or why that was done?

Holding it out here, Ahbi. We actually- - we purchased a very small accounts receivable portfolio and like we've talked in the past how we're converting some our relationships from transaction processing to payment processing, we did that with one of the smaller relationships we have.

Okay.

So, it would be similar to what you saw that happen last year with ExxonMobil only in the much sammler, much, much smaller size.

Got it, and it is just simply just flipping them over. There's no purchase consideration involved in doing that?

No. We pay them for the value of the accounts receivable portfolio based on the market assessment.

Yes. Okay. Okay, good. Great. And then just as a clarification, I think you said your Cap-Ex for the year was $19 or $20 million? Did I hear that wrong? Am I reading this reading this wrong? The cash flow statement says about $16.6 million?

Yes. That includes a capitalized lease that you need to add in from the cash flow statements. Non-cash flow recapitalized the one significant lease.

Okay. Okay, I got that one. And also Mike, earlier, you mentioned that the growth rate expectation for '08 will be similar to that of '07 at the core. Now, you put up about 7% growth in the fourth quarter to about 4% for the full year. Should we be keying off of the 7% number for '08? In other words, is that sustainable growth rate for '08 or is the 4% number more of the realistic growth rate?

Yes. We're talking more the entire year number, in the 4%.

Okay. So, coming off the 7% number in the fourth quarter, what would lead to a further softening into '08?

Some of the things that are affecting the fourth quarter that we talked about, the fourth quarter of '06. Having seen a rapid decline in that transactions per active card. That's, as Mike said, it was off in the fourth quarter of '07 for different reasons, but they were not exactly equal. So, you get a little bit of pickup on that comp.

Okay. I'll follow-up on that one off-line. Thanks.

(Operator's Instruction) At this time, we have reached the end of our Q&A session. I will now turn the conference back over to Mr. Mike Dubyak for any closing or additional remarks.

Now, I would like to just thank everybody and thank you, Andrea. Thanks everyone for listening. We look forward to speaking with you again next quarter, and this concludes the call.

Thank you, and that just concludes our conference call for today. We thank you for your participation in joining us. Have a great day.