WEX Inc (WEX) 2008 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Wright Express Corporation Third Quarter 2008 Conference Call. There will be an opportunity for questions after the prepared remarks. (Operator Instructions). Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Steve Elder, Vice President of Investor Relations. Please go ahead, Sir.

Good morning. With me today is our CEO, Mike Dubyak, and our CFO, Melissa Smith. The financial results press release we issued early this morning is now posted in the Investor Relations section of our website at wrightexpress.com. A copy of the release has also been included as an exhibit to an 8-K we submitted to the SEC.

We'll be discussing in non-GAAP metrics, specifically adjusted net income, during our call. Please see exhibit one included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income. I'd also like to remind you that we will discuss 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 our press release, most recent Form 10-K, and other SEC filings. While we may update forward-looking statements in the future, we specifically disclaim any obligation to do so. You should not rely on these forward-looking statements after today.

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

Good morning, everyone, and thanks for joining us. We hit the low end of our guidance range for revenue and earnings this quarter, but getting there was more difficult than we expected. Credit loss was in line with our internal forecast and our operating expenses came in lower, but what really affected us this quarter was the economy and the more pronounced slowdown in fueling volume that we began seeing in early July-- I'm sorry, in early August.

For more than a year now, existing fleets have been adjusting to the weakening economy by cutting back on the number of vehicles they operate and by driving fewer miles, which reduces their fueling activity. This accelerated in the last two months of the third quarter as economic conditions deteriorated, and it was evident across most of our SIC codes and market segments.

Although overall fueling volume for the third quarter was up 1% year on year, it still fell well short of our internal projections. Even MasterCard spend and revenue from-- MasterCard spend in revenue from late fees came in lower than we expected. In all told, this cost us roughly $0.07 per share in earnings. This was partially offset by the impact of lower compensation expense and higher fuel prices in the quarter.

In spite of the rapid fall off in the economy, we were on target in our projections for credit loss. As we said on our last call, we are seeing an increase in customer bankruptcies and slower payment on past due accounts. The performance of our receivable portfolio in the third quarter was consistent with our internal projections at roughly 20 basis points of fleet credit loss. Given the further deterioration of the economy recently, our revised, full-year guidance assumes that we'll have elevated losses in Q4. We expect credit loss for 2008 will come in several basis points above the high end of our five-year range of 11 to 22 basis points.

Looking ahead, we've taken a number of steps over the past few months to reduce our customer credit risk. These actions should help control risk to our loss rates in 2009. I will talk about some of these measures later on. Before going any further, I'll speak to the credit market concerns that are so pervasive right now, and legitimately so. I want to emphasize that we have seen no deterioration in the Company's liquidity or our ability to access the capital we need to fund our operations.

From a capital structure perspective, we have three and a half years left on our revolving credit facility with rates 100 to 200 basis points better than the current market rates. We had approximately $225 million available to us under this agreement as of the end of the quarter.

On the operational side, we used certificates of deposit issued by our industrial bank to finance our receivables. Demand for CDs remains strong as individuals look for a safe place to put cash. A large percentage of our CD portfolio rolled over this quarter, but with the drop off in fuel prices, our financing requirements have been reduced.

In addition, our ability to access fed funds for short-term borrowing has not changed. Including CDs and fed funds, our operating debt at the end of the third quarter was down by $105 million from the end of the second quarter, and our receivables are down $200 million.

Cash flow remains strong this quarter, and we used that cash to pay down debt, buy back stock, and acquire FAL for approximately $9 million. In light of the economic uncertainties, we put a higher priority on reducing our leverage, paying down approximately $7 million of financing debt, we bought back a modest $2 million worth of stock in the quarter, leaving us with $81 million remaining in our authorization.

With that as a background, let's take a closer look at the business in Q3. We've already established that fuel purchasing volume is trending down. In the installed basis specifically, the volume declined both sequentially and year on year for the third consecutive quarter to an extent not seen in the past. The next two factors to look at are attrition, our ability to retain the fleets and vehicles in that installed base, and front-end growth -- the number of new fleets and vehicles we add to our base.

Fleets are using every tool at their disposable to manage around higher fuel prices and vehicle operating costs, which enhances our customer value proposition. This helps us in terms of both customer retention and customer growth, and this was another good quarter for both of these metrics.

Our voluntary customer attrition rate remained low at just slightly under 2%, which is less than our historic average. We're continuing to keep our customers satisfied and actively using our cards. Despite the slowing economy, we've been able to maintain a solid new business pipeline in both our direct and cobrand channels, and we're successfully converting the pipeline into new fleet accounts and active cards. This is one of the real strengths of our business model, and why it's been so resilient through previous economic cycles. Thanks to our success in acquiring new customers, coupled with low attrition, we're continuing to grow, although slower than our historical rate.

Organic growth and total fuel transactions for Q3 remain in the mid single-digit range, increasing 3% from the third quarter last year. Looking at this growth by fleet size, in small fleets, the number of vehicles overall declined 1% in Q3 compared to the third quarter of 2007. As in the past few quarters, growth in the Wright Express direct channel where average vehicles grew 4% year on year, was offset by private label where small fleet vehicles were down 4%. Turning to the mid size and large fleet markets, the average number of vehicles serviced increased 2% from the third quarter of 2007. We expect to see continued growth in this segment.

Near term, the business we announced last quarter with the GSA should be fully rolled out by the end of the year, with Wright Express processing payments for fuel purchases and vehicle maintenance, and providing GSA fleets with accident management services.

We've talked for some time about our relationship with Citi. When we initially announced the relationship, it encompassed four portfolios with two major oils. At this point, we verbally agreed to go forward with only one of the portfolios with one of the oil companies. The major issue in the decision, among others, was the revolving credit requirement. Revolving credit is a new model for us, and financial and regulatory conditions have made it cost-prohibitive to build and rollout.

We anticipate the portfolio will be on board by the second quarter of '09. It will be fully funded, which is a change from our initial approach with Citi, and similar to our other private label portfolios, which have no revolving component. So the upfront investment is significantly lower. As a result, although the number of transactions in our Citi relationship will be smaller, we expect the overall profitability to be only slightly lower than the original contract.

Moving on, the other market we serve is heavy truck where our business consists primarily of private carrier fleets. For the third quarter, our heavy truck vehicle count was up 5% from a year ago. While driving growth in our core fleet business, we've been executing on a strategy to penetrate markets outside the core business and capturing the largest share of total business spend in those markets. The first of our diversification efforts was MasterCard, which focuses on mid-size businesses and the single use account product. MasterCard purchase volume, again, was up dramatically from a year ago, growing 31% from the third quarter last year to $670 million this quarter. Interchange rates were down somewhat due to the shift in mix towards our single use account product.

With that, I'll now turn the call over to our CFO, Melissa Smith. Melissa will take you through the Q3 financials and our guidance for the fourth quarter. Then I'll return to wrap up with some thoughts about the outlook for 2009 and beyond.

Good morning, everyone. As Mike outlined, today's economic conditions are very different than they were three months ago. In forecasting Q3, our data suggested that volume trends in July would continue through August and September, which obviously did not happen. Given this decline in volume, we took aggressive measures to help mange costs in the business during the third quarter.

We are now focused on generating the best possible results in a challenging environment, and positioning ourselves for further growth when the economy turns around. This includes finding new opportunities for revenue generation within the installed base of customers, continuing to reduce costs and credit risk, and maximizing the potential for growth in our recently acquired businesses.

Looking at our results for the third quarter of 2008 in detail, total revenue increased 24% to $108.5 million from $87.7 million for the third quarter of 2007. Net income to common shareholders on a GAAP basis was $72.3 million, or $1.82 per diluted share. This compares with net income of $22.3 million, or $0.55 per diluted share in Q3 last year.

The Company's adjusted net income for the third quarter of 2008 was $21.8 million, or $0.55 per diluted share. This non-GAAP figure excludes an unrealized mark-to-market loss on our derivative instruments, as well as the amortization of purchased intangibles. Adjusted net income for the third quarter last year was $22.3 million, or $0.55 per diluted share.

The average number of vehicles serviced in Q3 2008 was approximately 4.5 million compared with 4.4 million a year earlier. Total transactions grew 14% in Q3 2008 to $72.5 million from $63.4 million in the third quarter last year. Our transaction growth reflects a combination of the new Pacific Pride transactions and 3% organic growth. Combined with 40% growth in the price of fuel year on year, these drivers increased fleet revenue by 24% to $101 million.

Payment processing revenue in our fleet segment was up 25% to $76.8 million from $61.2 million in Q3 last year. This also reflects the increase in the price of fuel. The average retail fuel price was $4.02 per gallon, compared to $2.88 in the third quarter last year, which bolstered our results for the quarter.

The average expenditure for payment processing transaction for Q3 increased 37% from last year to $80.84. The growth in payment processing revenue also reflected a nearly 4% increase in the number of payment processing transactions this quarter. Our net payment processing rate dropped 22 basis points in Q3 2008 from the prior year to 1.71%. About a third of this decrease is due to the impact of higher fuel prices as our rate declines at merchants with hybrid contracts as fuel prices increase.

The remaining two thirds reflect higher rebates in our renegotiated rates with some of our larger merchants. By the end of Q3, we had renegotiated with most of the major oil companies. We now have approximately 55% of our transactions at merchants with hybrid rates. We expect this to increase to approximately 60% by early next year.

With the drop in fuel prices recently, we expect to benefit from these contracts by several basis points in Q4. Additionally, we built a lower net payment processing rate into our prior guidance for the second half of 2008. The actual rate for Q3, however, was slightly lower than our projections due to higher level of fleet rebates. We expect to continue to win business in the large fleet market, resulting in continued slight declines in our net payment rate.

The MasterCard segment contributed $7.5 million in total revenue in Q3, compared with $6.3 million a year ago, which is an increase of 19%. This growth was once again largely driven by MasterCard purchase volume, which increased 31% from $511 million in Q3 last year to $670 million this quarter. MasterCard rebates continue to increase in Q3, reflecting the continued growth in their single use account product, which typically carries a higher rebate, resulting in declining net interchange rates compared to Q3 last year. We continue to expect strong revenue growth in MasterCard, going forward.

Turning now to operating expenses. On a GAAP basis, the total for Q3 was $54.1 million. This compares with $44.7 million in the third quarter last year. Salary and other personnel costs were $14.6 million in the quarter, down $1.6 million from last year. Our average headcount for Q3 was 733 compared with 687 last year. 43 of the 46 additional positions resulted from our acquisitions over the past year.

Reflecting the decline in fueling volume and our expectations for Q4 results, we did not recognize any expense for bonuses or stock compensation related to performance share or units in Q3. We also reversed our prior accruals. Together, these actions provided a total benefit of approximately $3.5 million compared to our expectations for the quarter.

Service fees are up this quarter, $1.2 million. Fees we paid for processing MasterCard transactions are up about $500,000 in line with the increase in spend volume. In addition, professional fees are up about $400,000 for legal and consulting fees related to an investigation of additional market opportunities, and by $200,000 related to Pacific Pride.

Our Q3 credit loss, on a total basis including both fleet and MasterCard, was up $6 million from last year to $9.3 million. As Mike said earlier, our credit losses on the fleet segment came in where we projected at 20 basis points. This is 9.4 basis points higher than we reported a year ago. As business-to-business card providers, we're seeing an erosion in credit quality, but it's not as pronounced as the trend in the consumer segment. Wright Express cards are charge cards -- not revolving credit cards -- and we charge a late fee if they're not paid on time. That's why the vast majority of our customer have continued to pay us, on average, in less than 30 days.

As we reported on last quarter's call, the increase in losses is driven by a small percentage of balances that were aging into delinquent categories. As the economic climate deteriorated, most customers experienced liquidity concerns and cash flow shortages, leading to an increase in charge offs. We factored this into our projections for the fourth quarter, as well as the impact of elevated gas prices earlier this year. As a result, we believe credit losses will exceed our five year range of 11 to 22 basis points by several basis points for the full year, 2008.

Depreciation and amortization expense is up $1.3 million over last year to $900,000 in amortization related to our acquisitions, and $400,000 for assets placed into service.

Operating interest expense for the third quarter increased by $400,000 from Q3 a year ago to $9.6 million. Although higher fuel prices increased the average operating debt level to $750 million, which is up 29% on average from last year, the increase in debt was offset by a reduction in rates. For the quarter, our interest rate (inaudible) certificates of deposit and fed fund borrowings declined approximately 20 basis points from Q2 to 4.06%. We are down nearly 100 basis points from the first quarter.

Mike mentioned the rollover in our CD portfolio in Q3. Approximately $187 million, or one quarter of the portfolio, matured during the quarter with a weighted average rate of 4.2%. With a recent decline in fuel prices, our financing requirements will be lower, so we anticipate our operating debt balances will come down in Q4.

Our effective tax rate on a GAAP basis was 33.2% for the quarter, compared with 36.6% for Q3 a year ago. Our adjusted net income tax rate this quarter was 19.9%, compared with 36.6% for Q3 2007. 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. The net change of the decrease in our tax expense and decrease to other income was approximately $600,000 negative. These adjustments represent the change in the Company's estimated future tax rate of less than two tenths of 1%.

We expect to report similar swings both up and down as we adjust our estimated tax rate going forward. Since these are non-operating items, we will begin to exclude these impacts related to the tax agreement with our former parent company when calculating adjusted net income in 2009. Without these changes, due to our tax receivable agreement, we expect our full-year tax rate to be just under 38% for adjusted net income.

Turning to our derivatives program, during the third quarter, we recognized a realized loss of $16.3 million before taxes on these instruments, and an unrealized gain of $82.4 million. With a dramatic decline in oil markets, as of today, we now have a derivative asset of $25 million.

As this point, we have had our targeted 90% of our estimated fuel price related earning exposure for 2009, and we partially hedged the first three quarters of 2010, working toward an objective of hedging 80% of our estimated fuel price related earning volatility for that year. The weighted average price for 2009 is between $2.79 and $2.84. For the portion of 2010 that we have completed, our average price is $3.45. However, assuming the oil market stays roughly where it is today, this will come down as we continue to roll in new purchases.

Due primarily to higher fuel prices at the end of the third quarter compared to year end, our accounts receivable balance and the reserves for credit loss, increased $1.4 billion-- increased to $1.4 billion from $1.1 billion at December 31st.

Our financing debt balance decreased by $7 million from approximately $219 million at the end of last quarter, to $212 million at the end of Q3. This reflects the acquisition of FAL, share repurchases, offset by cash flow generated.

The conclude of Q3, with a leverage ratio of approximately 1.3 times, we continue to target leverage between 1.5 and 2 times for the long term, and we will allocate our free cash flow to its best use, whether it's debt pay down, share buybacks, acquisitions, or internal reinvestment. However, given the current economic conditions and the premium on liquidity in today's markets, our leverage will likely remain below this level for the short term.

Capital expenditures were $3.7 million for the third quarter, reflecting continued reinvestment in our core product offerings and strategic diversification. We've made it a priority to reduce these expenditures wherever possible. And for 2008 as a whole, we anticipate that total CapEx will come in between $18 million to $19 million.

I'll conclude with some major assumptions and our revised financial guidance for the fourth quarter and full year 2008. First and foremost is the assumption that the economy will remain very challenging, which will continue to constrain fleet fueling activity. We also anticipate that charge offs will increase, and there'll be some erosion in the credit quality of our portfolio, bringing our credit loss to approximately 40 basis points, depending on fuel prices.

The decreased activity levels we saw particularly in August and September have continued in October. We expect activity to remain at this low level through the remainder of the fourth quarter. We've also factored in the significant drop in fuel price, which is about $1 compared to the last time we gave guidance, into our Q4 revenue projection.

Our hedge will buffer the majority of the impact to earnings, but this is a significant decline. So even though we're approximately 90% hedged, there will be several cents of earnings impact to the quarter.

Let me remind you that our forecast for the fourth quarter and full year 2008 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, and the Company's fuel price related derivative instruments and the amortization of purchased intangibles.

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

For the fourth quarter of 2008, we now expect to report revenues in the range of $81 million to $87 million. This is based on an average retail fuel price of $2.90 per gallon. So the full year 2008, we now expect revenues ranging from $394 million to $400 million, based on an average retail fuel price at $3.54 per gallon. As for earnings, for Q4 of 2008, we expect to report adjusted net income in the range of $14 million to $15 million, or $0.32 to $0.37 per diluted share. We now expect adjusted net income for the full year 2008 in the range of $75 million (Sic-see press release) to $76 million, or $1.86 to $1.91 per diluted share, and approximately 40 million shares outstanding. I'll now turn the call back over to Mike.

Thanks, Melissa. We're facing some of the toughest and most uncertain macroeconomic conditions of our lifetimes, and our guidance for the fourth quarter takes this into account. Our challenge for this quarter and for 2009 is to continue to pull every lever we can to reduce costs and drive top line growth both for the short and long term.

Taking the cost side of the equation first, as we saw our business slowing several quarters back, we took early action by adjusting our hiring plans, and not adding 60 new positions that we had budgeted for the year. Then in early October, we restructured our field sales operation and streamlined several other functions, eliminating 53 additional positions across the company. The number of employees who actually left was 29, since some of the people whose jobs were eliminated were reassigned to other positions in jobs we recently created to service the GSA fleet business.

Severance and other related expenses for the employees who are no longer with the company will result in a one-time charge of approximately $300,000 in the fourth quarter, which is included in our guidance. We expect the reorganization to generate approximately $4 million in annual savings, going forward.

In terms of credit loss, we expect that 2009 will continue to be a challenging environment for losses. We've taken a number of steps to reduce our risk exposure in '09. For example, we've reduced the credit lines available to higher risk fleets, and although they're a small part of our portfolio, we're now requiring that all new over-the-road truck fleets pay us no less than weekly as opposed to monthly for the other customer segments.

With these and other measures we have taken, we feel better about the outlook for credit loss in '09 than our expectations in the fourth quarter of '08 would indicate. We'll also see some benefit from hedging and higher prices next year. The top end of our collar that we've locked in for 2009 is $0.24 higher than the top end we locked in this year. Our weighted average price for 2008 was $2.60, and as Melissa said, prices for 2009 are between $2.79 and $2.84.

Looking at the top line, we have the potential to drive more revenue through our installed base by changing the way we charge late fees and by raising overnight delivery fees, among other items. These changes are in line with the competition. In addition, we'll have the GSA fleet business on board for the full year, and the Citi portfolio will roll out during the first half of next year. Looking ahead longer term, the new international component of our business is also gaining traction.

In summary, we clearly face challenges with the impact of the slowing economy on fueling volume and bad debt. But we believe in the sustainability of our business model. We're continuing to perform well operationally, and our liquidity position remains strong. I'm confident in our ability to manage through the near term market turbulence, and in our prospects for growth and success in the long term. With that, we'll be happy to take your questions. Operator, you can proceed with Q&A now.

Thank you, Sir. (Operator Instructions). Our first question today comes from the line of Greg Smith with Merrill Lynch. Please proceed with your question.

Yes, hi. Good morning, guys.

Good morning.

Just hoping to get some color on your CDs, where the rates that you're having to pay are falling sort of versus expectations. Just considering, is there more comp-- heavy demand, but is there more competition? Just a little confused where those rates may be falling out.

The rates, we said were about 4.06% to the last quarter. The new CDs are between 3% and 4% depending on the maturity. And so there's definitely availability, but we haven't really seen a decline in rates.

How do you actually sell those CDs, and who are actually the buyers?

We go through brokers until we have a series of brokers, a half a dozen or so that we work with. And they're selling to individuals.

Okay. So they're brokered, and then it's individual buyers.

Yes.

Okay. And then, Melissa, with the charge offs, do you have a rule of thumb on just every five basis points of additional charge offs, what that does to EPS? Or every ten -- just some sensitivity there?

Yes, it's roughly one basis point charge off equals $0.02 of earnings for a full year.

$0.02 for the full year. Okay. And then if you were to roll-- do your next hedge, if you were to do it today, do you know where the prices are, roughly?

Yes, the prices are a little bit above $2.50 right now for 2010.

Okay, great. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

Thanks. So I guess my one question, let me ask, the $0.07 shortfall that you called out in your prepared remarks, can you break that down for us again? I didn't quite catch exactly what drove the $0.07.

It's really volume. So when we went into the third quarter, as both Mike and I said, we looked at volume trends in the month of July. August and September trailed off lower than what we had anticipated by a couple percent, 2%, 3% from what we had expected. And that's driving the majority of that. We also were a little bit off on late fees in MasterCard, which, again, we're tying all to this-- it seems to be driven by what's going on overall in the economy.

So the delta in the payment processing rate and where that came in was all the rebates, that wasn't much of a contributor?

No, no. We had said on the call, on our last call that we had anticipated renegotiating those rates. And so it was very close to what we had expected. It was off a little bit because of the rebates were slightly higher than we expected, but that wasn't the material driver to the quarter.

Okay. So it was really just the volume trends and somewhat the late fees on MasterCard?

Late fees and mix on MasterCard.

And the mix on MasterCard. Maybe if I can just sneak a follow up then, and just the visibility into the payment processing rate in the fourth quarter? And also, like Greg asked, maybe a rule of thumb now. Given the restructuring, every $0.15 change in stock prices, what does that equate to in terms of the payment processing rate?

Yes. The first part of your question, we have renegotiated with the majority of the oil companies, so we have reflected the majority of that in our rate in Q3. And so we think, actually, that we're going to benefit because the price of gas is dropping, obviously. And so we think that the rate, when the merchants who actually go up a little bit sequentially in the fourth quarter because of that. And we'll see continued pressure, we think, on rebates as we continue to add large fleets. But the bulk of the pricing we think has been reflected already.

Thank you. Our next question comes from the line of Robert Napoli with Piper Jaffray. Please proceed with your question.

Thank you. Maybe a follow up on Tien-Tsin's question on the payment processing rates and kind of the outlook for the payment processing rate, assuming that oil prices stay and gas prices stay generally where they're at today. You said that you expect to see that rate move up slightly in the fourth quarter from the reported rate in the third quarter. And then would you expect to see that rate be stable then, assuming no adjustments in oil prices for next year? And then we would expect it to go up if oil prices decline and go down if oil prices increase?

Well, we think that we factored in most of the changes with the merchants, and we've got a little bit more negotiating to do. We said we've got about 55% locked in these hybrids, and we think we'll get to about 60% by the first quarter of next year. There's a little bit more where we have to negotiate. So we think the rate with the merchants is relatively stable, and then it's just a question of the rebates to the fleets. And that's going to be something we're going to continue to see pressure with overtime, but it would be similar to what we've seen historically.

Shouldn't the pressure with oil at 66 versus 130 be dramatically less, and--?

Yes, and actually, we essentially have negotiated into these hybrid contracts. It's going to benefit us to feel prices drop. So the fact that we've done these negotiations and the majority of them are complete, as you said, we wouldn't see as much pressure on renegotiating anyway, but we think we're going to get some benefit from what we've done.

Okay. And then following up, just a quick follow up on Mike's on charge offs in the fourth quarter. And 40 basis points is a pretty big number, and the outlook for '09 being more optimistic about the outlook on credit losses for '09. Can you maybe talk a little bit more about that and what-- would the outlook for '09, based upon the adjustments you've made in a tough economy, be full-year losses around '08 levels, or higher or lower?

Well, what I was trying to say was that we put in new credit risk management programs that I think put us in a better place going into next year than if you would when we entered this year. I don't think we're trying to say that we have a good crystal ball on what the economy is going to do to the overall risk of bad debt, but at least our controls and some of the things we've done to tighten up the credit risk side of our business, at least puts us in a better place from a positioning standpoint. I don't think we're sitting here today saying that overall we're projecting bad debt next year in some fashion for '09.

We do know that sequentially, Q4 and Q1 tend to be higher for us. And we've definitely seen that pattern this year. And from what we do have for visibility into next year, we would presume that you would see a similar pattern to the first quarter of next year. But some of the 40 basis points is driven because the numerator is declining as fuel prices drop-- I'm sorry, the denominator as fuel prices drop.

Right. So the charge offs are related to much higher fuel price levels, and the charge offs you're trying to the current period's volume.

But the current period's PPG--.

The charge offs are going to be coming through from what-- from about 120 to 150 days ago, and so they'll be on elevated fuel prices. And so that's also impacting the fourth quarter.

Thank you.

Thank you. Our next question comes from the line of Patrick Burton with Citigroup. Please proceed with your question.

Hi. Good morning. I guess my question is as you go through this difficult environment, what are the opportunities to gain market share from some of your weaker competitors, so when we come out some day on the other end of this, you've got a lot of leverage in the business? Thanks.

I think we're continuing to see strong growth in our pipelines. Unfortunately, what's offsetting that as we've talked about is the installed base that's slowing. But even our realignment was to make sure that our sales force now have more of a synergistic capability of selling the MasterCard together with the fleet card, and then looking also across all of our diversification strategies of TelaPoint and WEXSMART. So all of that I think will give us some lift.

But I think the biggest thing is with our liquidity capabilities, I think we want to be smart to say, if there are opportunities that present themselves to us during this period, we want to make sure we can take advantage of that. We think there will be difficult times for companies, and if we have the ability that can really help us in the future, we will take advantage of that situation, if possible.

Just a quick, sneak in follow up. Mike, aren't some of your competitors owned by private equity companies, if I recall, that may have some very significant financial leverage?

They do. Two of our competitors are owned by private equity players.

Okay. Thank you.

You bet.

Thank you. Our next question comes from the line of Timothy Willi with Avondale Partners. Please proceed with your question.

Thanks. I know you haven't given '09 guidance, and obviously you're giving us fourth quarter of '08, but I was just wondering qualitatively, if you could talk about what you think will be the more important variable over the next three to four quarters. Will it be volume or credit losses in terms of what you guys expect to probably be the bigger driver of the next several quarters of earnings?

Yes, I think they both will, but we want to make sure on the volume side, we've talked about the fact that the differences next year would be things like the GSA being there for the full year. Looking at the Citi capability coming on in the first half of next year as well. So I think those are some of the changes to next year. But clearly, the slowdown we've seen in the embedded base we're assuming will continue, and we're assuming there will continue to be pressure on bad debt as well.

Okay. If I could just ask a quick follow up on Citi. I know that originally it was two pieces of business -- a smaller one and a larger one. Is it the smaller one that is coming on at the beginning of the year, or is it the bigger one's been moved up and that's the only piece you're brining on?

It is the smaller one, and the change is we moved it over to a funded program. So that's what we talked about it will give us a little bit of lift on revenue for that portfolio, and won't be as much of an impact on the bottom line for us, because we're-- it's in a funded program.

Okay, thank you very much.

Thank you. Our next question comes from the line of Anurag Rana with KeyBanc Capital Markets. Please proceed with your question.

Good morning. Melissa, this question is just about the cost, the salaries and other personnel costs down sequentially about $3.7 million. In the fourth quarter, should we look at similar run rate in salary and other personnel expense? And I think I heard Mike talk about reduction of overall expenses around $4 million for next year. Now is that off of a base of $14.5 million or the $18 million that we saw in the fourth-- in the second quarter?

Okay. There were about $2.5 million of compensation charges in Q3 that we reversed that were for prior periods. And so that is something that is going to be unique to Q3 to need to reflect that in anything you're projecting, going forward. The $4 million that Mike talked about is all from our previous run rate, so I wouldn't apply it to that reduced base, mostly because of that one-time charge.

Okay, that's fair enough. And second one, as someone just asked you, that you're not in the position to give '09 guidance, but as we look at, even if for example, for fourth quarter, if we plug in a lower fuel cost, we're still short of, say, $0.04 or $0.05 where the model would take us. And I presume a lot of that has to do with fruition for credit losses going up. But as we look into '09, could you give us any idea of ballpark, plus or minus where the EPS range is going to be, or what do you expect in terms of basis points and credit losses?

Yes, we intend to give guidance for '09 on our next call, so I can't give you a range right now. Obviously, we're spending a lot of time looking at 2009, and I think Mike gave a bunch of the highlights. We know that we've got some uncertainty around credit loss, we know that the fourth and first quarter are typically higher in that seasonal.

We haven't seen a significant decline in credit quality, so there's the good indicators underneath when you actually start delving into the portfolio itself. So you're seeing minor erosion within that space, but not anything that's a wholesale change. And as Mikes said, we're looking at volume trends continuing from the fourth quarter into next year, and so we're paying attention to trying to reduce costs and add in new sources of revenue that we haven't seen in the past to try to offset some of the uncertainty.

Alright, thanks. And just one more, could you give us any idea about free cash flow estimate for 2008? Thanks.

Free cash flow estimate, I would still put it roughly in line with our A&I guidance. We haven't had any significant changes between depreciation and our CapEx estimates.

Thanks.

Thank you. (Operator Instructions). Our next question comes from the line of Tom McCrohan with Janney Montgomery Scott. Please proceed with your question.

Yes, hi. Just trying to get a read on the charge offs for this quarter. What was the dollar amount of net charge offs in Q3?

It's not something that we have disclosed yet.

If you think, based on-- it looks like it got better based on sequential change and reserve levels that were reported, you can back into it. With the change in reserves, you ended the quarter with $16.4 million in reserves, you can (inaudible) that charge offs given the provision for the quarter. And it looks like charge offs, on a net basis, were down to like $7.8 million.

Charge offs have, I'd say, generally increased a little bit, sequentially. You haven't seen a huge change between Q3 and Q2. We're digging through the numbers, but if I-- but there wasn't a significant change up or down, if you're looking at it sequentially. We do anticipate it sequentially being a little bit higher in Q4. And that's, as I said before, somewhat driven based on fuel prices earlier in the year. You're starting to hit the periods where they were really elevated in Q2, and so that's driving some of the increase. And some of it's just the people on the phone that are talking to our customers are having a little bit harder time collecting on some of the most delinquent accounts.

Is there any significant recoveries during the quarter?

Definitely the recoveries, yes. Not a wild change, though, in the amount that we're recovering.

Okay. And my last question. On the change in the EPS guidance for '08 is down I guess about $0.25 would be prior guidance. Can you-- I know some of it's due to the position, but if I, in my model, if I assume 40 basis point as a credit loss for Q4, that lowers my numbers by $0.06. So I'm just trying to figure out if you can parcel out for us the composition of the $0.25 decline; how much of it is provision and how much of it is other things?

Yes, and the largest part from the last time we gave out guidance is volume. I know Mike talked about $0.07 in the third quarter related to that, and that was the impact of August and September. So when you move that into a full quarter, it's in the range of $0.10 in the fourth quarter.

And then the decrease in fuel prices that we have factored in from the last time we gave guidance is having an impact. And then the third item would be bad debt in the fourth quarter. It's a little bit higher than we expected before.

And the fuel prices on the unhedged portion, she's talking about.

Yes, okay. That still gets to like $0.20. Like $0.10, say, roll the $0.07 forward, that's about $0.10. About $0.06 for the credit losses, and you said earlier in your prepared remarks, there's a few pennies due to the lower fuel prices for the unhedged portion. That takes you to about $0.20, and you're down-- there's another nickel there that I just can't figure out where it's coming from.

It's a little bit more than $0.20 if you look at those three things. That's the bulk of it. You know, I talked about the tax rate within the quarter was off about a penny and a half because of the adjustment to the-- for tax asset we have.

Okay. Thank you.

Thank you. Our next question comes from the line of Robert Dodd with Morgan Keegan. Please proceed with your question.

Hi, guys. Going back to the payment processing rate and the sensitivity to fuel prices, how that affects the hedging program. I mean, obviously with negotiating more flat fee into the late with your customers, you've reduced your sensitivity, but the hedge was put on-- you know, most of the hedges that are going to affect in the next couple quarters will put on well before those prices were renegotiated.

Was the change in sensitivity of earnings, was it part of a long-term plan to renegotiate those prices and so it was built into the hedge? Or are we going to have an increasing mismatch with the presumed hedge sensitivity being much more than the actual sensitivity to fuel prices for the next couple quarters?

We had presumed, when we were doing the hedge purchases, that we would layer in more hybrid contracts in this year. And so we've gotten questioned in the past on why the number of gallons we're hedging were actually declining. And that was-- with foresight into the fact that we did anticipate going to this type of contract.

Just on the relative scale, did you expect to be in the position you are now, or did you factor in going from a third fixed fee or a third hybrid to 50% or 50%-- basically, is it exactly in line with what you were looking for as there was some-- or is there some difference?

It's very close to what we expected.

Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Ben Kadlec with First Investors. Please proceed with your question.

Hi, how are you? Quick question on the GSA and the Citi. Can you give us an idea maybe of the quarterly revenue and earnings benefit on a normalized level for '09, what each of those would provide over your base revenue and earnings in the fourth quarter, or this quarter?

I can give you some of the information to kind of benchmark what this is going to do in terms of transactions and total fuel transaction growth to Wright Express. The GSA, for example, is about 250,000 vehicles, about 7.5 million fuel transactions, another 1.5 million non-fuel transactions. So that will increase our vehicles by about 5% and transactions about 3% to 4%. And I think you can probably then factor that in.

On Citi, there'll be about 100,000 vehicles that will come on, as we said, probably in the first half of the year. There's approximately 4.5 million transactions in the annual revenue, depending on the price of gas, would be in the range of 4 million to 5 million.

Okay. And then are there any other sort of large contracts like that in RFI or out there to get currently?

No, there's nothing else that we can say is mature enough to talk about.

Not at that size.

Not at that size for GSA--.

The only thing I'd add to that on the GSA is that their average transaction size is a little bit smaller than what you would see as an average fleet, just because of the vehicle mix that they have.

Okay. And then do you have an idea of how many more, I guess, the rate of increasing market share on the smaller transaction size? Have you sort of looked at your pipeline and deals on that?

Just in general, you're saying that the type of business that we intend to bring in based on our pipeline?

Yes.

Yes, and I think that continues to be spread. I mean, we continue to have good success with our inside sales organization that brings in small fleets. We still have good success with our outside sales force bringing in the mid-size fleets, and then we have a sales force focused on very large elephants like the GSA, but there aren't many of those out there. So the pipeline is pretty robust across all fleet sizes. And even MasterCard has had a good, strong October, and we continue to see that as a growth opportunity.

Thank you. Ladies and gentlemen, our next question comes from the line of Robert Napoli with Piper Jaffray. Please proceed with your question.

Thank you. I was hoping you would give an update on the progress you've made on the international business with the acquisition, and what your strategy is for that piece of the company?

Yes, it's too early to talk about anything specific, but the strategy has been that we want to use this to be a processor and operator for international portfolios for the major oil companies that are now managing their business on a worldwide basis. So the heads of these businesses are managing worldwide, where in the past, they used to be silos in the different continents, which gives us the ability to hopefully leverage the relationships we have built in North America and the strength we built in North America with our brand and reputation.

So, we're having good, robust discussions. We feel very good about the progress, but beyond what we're servicing today in the Asia Pacific market, there's nothing more that I can talk about, specifically.

I mean, do you see the opportunities as more or less, I mean, how significant-- five years from now, how significant of a piece of your business would you like it to be, or maybe something in that regard?

Yes, I don't think we've given guidance on that, but we clearly see it being-- it's going to take till 2011 and 2012 before it becomes really meaningful. But I don't know, we don't have meaningful revenue probably-- I don't know if you want to--

Yes, I think if you look at just the size of opportunities out there, we're excited about the potential. It's just been-- they're long-term arrangements, and so it'll take a few years to even get contracts in place.

And some of the negotiations could be everything from just being a processor using our new system, to fully operational, to where we might even fund receivables. So the revenue streams will vary depending on which one of those three are in place with some of these major oils.

Are there other acquisitions internationally that you would need to build out that platform, or is that the one you have--

No, we feel very comfortable with addressing the needs of the major oils that we've talked about. The platform is what we need to be successful. Could there be opportunities just to enhance the overall value proposition we offer these majors and their fleets? That's a possibility for acquisition, but the basic FAL platform gives us what we need to penetrate that international market.

Great. Thank you.

Thank you. Ladies and gentlemen, our next question comes from the line of Timothy Willi with Avondale Partners. Please proceed with your question.

Thank you. Follow up on credit. I can't remember if you said it or not, but are your delinquency rates still generally running at about 1% of volume?

Yes. Our aging is about 98% current, which is a little bit over 98%, which is actually in line with Q3 of last year.

Okay, okay. So no real change there in terms of aggregate. And then second is, obviously you've got a very large installed base, but just thinking sort of forward for the company, longer term, is there anything you're seeing now in terms of the underwriting or selling process with new accounts in terms of managing credit risk more effectively to ensure tighter underwriting on a go-forward basis with new accounts, may be more selective? I think you've learned from people that are having problems that you identify on the front end and say this is not the kind of customer we want to be selling to because there's a higher risk of loss under financial strain. Anything like that?

Yes, actually, to give you a bit of a lengthy answer back, we always go through and we post-mortem our losses that are greater than $25,000 has been something we've done as a practice. And obviously, there's more of them now. And so based on that, we are continuously evaluating our credit policies to see if we should make any changes.

The most significant change we've made is with the heavy truck market, which is a very small percentage of our portfolio, but has driven the higher percentage of losses than the size of the customer base. And so we're requiring people to pay us quicker now.

We've also gone through and looked at the risk weighting of the portfolio and pulled back credit lines with the riskier of the accounts. Our approval rates, in general, are down almost 10%. Actually, a little bit over 10% compared to last year. And so there's been a whole host of things that I would say, actions we have taken in order to make sure that we're limiting our exposure as much as we can.

Thank you, ladies and gentlemen. Unfortunately, we've reached the end of our allotted time. Therefore, I would like to turn the call back to Mr. Elder for any closing remarks.

Well, that concludes our call today, and we thank you for joining us.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.