WEX Inc (WEX) 2008 Q4 法說會逐字稿

Good morning everyone and welcome to the Wright Express Corporation fourth-quarter and year-end 2008 conference call. There will be an opportunity for questions after the prepared remarks. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the call over to 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 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 filed with the SEC.

We will be discussing a non-GAAP metric, 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 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.

Hello everyone and thanks for joining us. We executed well in a very tough economic environment this quarter. As planned, we added three pieces of business from the federal government including GSA Fleet, one of the largest fleets in the United States, to our portfolio and continued to diversify our revenue streams.

We generated significant cash flow during the quarter and continued to maintain excellent liquidity. As a result, we exited the quarter very well-positioned to face the challenging economic environment ahead and even more so compared with our competition.

We continued to see deterioration in the business model during Q4. If you exclude new business, new customer additions and look only at the installed base of fleet accounts on a same-store sales basis, in the second third quarters we saw a low single digit declines in total fuel transactions.

This decline continued in Q4 as the economy weakened further. The drop in volume was broad-based and the vast majority of our [SIC codes] were down from the prior year.

Customer activity continued its gradual decline in October and November and then tailed off more significantly in December. Volume from existing customers declined 9% from December of '07.

We believe December results were impacted by an unusually high number of businesses curtailing operations around the holidays. Even with the addition of the GSA portfolios in December, total payment processing gallons were down more than 4% from Q4 last year, below the assumptions in our fourth-quarter guidance.

Another big factor in our results this quarter was the drop in the fuel prices which also reduced our revenues. The average price declined from $3.06 per gallon in Q4 2007 to $2.59 this quarter, while our guidance was based on $2.90 per gallon.

Looking at the front of our business for the full year, the sales force added more than 600,000 new vehicles in 2008, including approximately 278,000 from the federal government, which exceeded our plan at the start of the year. Going into the year, we expected our existing customers to add about 1% to their purchase volume compared to 3 to 4% historically.

What we saw, however, was continued erosion in both the number of active vehicles and gallons per vehicle. Fueling volume in our existing customer base actually declined by about 4% for the year. We have offset some of this erosion by adding new business and controlling attrition.

For the full year, voluntary attrition was 1.8%, well below our target of 3% which speaks to our ability to service our customers and generate great customer loyalty. As we expected, the other major challenge in the fourth quarter was credit loss.

Our guidance assumed a difficult collection environment and a higher level of charge-offs, coupled with falling fuel prices leading to roughly 40 basis points of credit loss. The actual Q4 number came in at 51 basis points, raising the full-year losses to 28 basis points.

The receivable portfolio performed overall about what we expected. But credit loss was higher than we assumed, due mainly to a single large fleet bankruptcy.

We took a number of steps last year to reduce credit risk and offset some of the downside by tightening our credit standards and reducing the credit lines. We will continue to segment our portfolio and make adjustments as needed based on new information.

We also altered the way we calculate late fees by increasing both the interest rate charged and the balance subject to the charge. While the vast majority of our customers are still paying us on time, we want to increase the penalties on those who don't. We expect this change to help offset some of the increase in credit losses we've seen

The front end of our business continues to perform well and we expect this to help us in our results in 2009. We reorganized our sales force in the beginning of the fourth quarter and are continuing to do a great job bringing in new accounts.

As I mentioned earlier, the big story this quarter around customer acquisition was adding the general services administration to our government portfolio. The implementation occurred as expected at the beginning of December, adding approximately 278,000 vehicles.

We will not see the full impact of the GSA until Q1 2009. Largely as a result of adding the GSA, the average number of vehicles serviced in the mid and large size fleet market was up 11% from the fourth quarter of '07. In small fleets, the number of vehicles overall declined 1% year on year as the business environment weakened.

In our heavy truck, private carrier fleet segment, the vehicle count was up 1% from the fourth quarter last year. Breaking down our small fleet sales results by channel, in the Wright Express direct channel, the average vehicle count was up 1% from Q4 a year ago. In private label, the number of small fleet vehicles was down 4% year on year.

Each of these comparisons is affected by the declines in our existing customer base that I spoke about earlier. As we begin the first quarter, our sales pipelines are in good shape. We just had our annual sales meeting and the group is excited about the wide array of products they now have to offer to both new and existing customers.

We're also making good progress on our long-term revenue diversification strategy. One focus in this area is the WEXSMART telematics business and Q4 was the best quarter ever for WEXSMART. With new partners and fleets buying into the program, we added nearly 1000 vehicles in December alone.

WEXSMART expands our value proposition by helping fleets reduce miles traveled and maintenance cost. Along with providing us with a new recurring revenue stream from each customer, WEXSMART makes it less likely for the customer to switch providers for their payment processing solutions. Therefore our relationship with the customer is that much more resilient.

Our first diversification play was MasterCard. Purchase volume on our MasterCard was up 21% in the fourth quarter last year to $586 million. This channel is continuing to grow despite headwinds in the travel sector which represents a significant portion of our MasterCard spend. Although the market is declining overall, our sales reps have continued to identify new sources of spend at existing customers.

In April last year, we announced that we would suspend the development of a new product for the construction industry. As we went through our strategic planning process, we still believe the construction marketplace represents an attractive opportunity.

However, given the problems in the economy and construction in particular as well as the constraints of our 2009 budget, it is impossible to predict when it will make sense for us to enter the market. This uncertainty lowers the probability that we will utilize the software we developed for the construction vertical.

As a result, we have taken a $1.5 million non-cash asset impairment charge this quarter related to the prior investment in product development. This onetime non-cash charge does not affect our business operations or liquidity and we have excluded it from our Q4 adjusted net income.

Looking at the other diversification efforts, Pacific Pride met its numbers for the year and is doing well. TelaPoint is positioned for a solid 2009 and we also feel good about our most recent acquisition, the New Zealand based FAL which we've rebranded, Wright Express New Zealand.

All-in our diversification plays WEXSMART, International, TelaPoint, Pacific Pride and MasterCard contributed approximately 14% of our total revenue in the fourth quarter and we expect this growth to accelerate in 2009. Our ability to make cash acquisitions like FAL and Pacific Pride while also paying down our debt and buying back stock this past year demonstrates the power of our business model. It also demonstrates that in today's market, there are tremendous advantages in having a healthy level of liquidity.

Our free cash flow was very strong throughout 2008. Looking back at the full year, we generated more than $100 million in cash which we used to acquire Pacific Pride and FAL for a total of $42 million and to reduce our financing debt by $29 million compared to December 31, 2007.

This brought our leverage down to roughly 1.3 times EBITDA at year-end. We also bought back 1.5 million shares of stock during the year, for a total of nearly $40 million including 515,000 shares or $7.6 million in the fourth quarter.

Before going any further into the financials, I will now turn the call over to our CFO, Melissa Smith. Then I will return for brief wrap-up before we go to your questions.

Good morning everyone. Our business model was put to the test in the fourth quarter with lower volume, declining fuel prices and elevated credit losses all working against us. However, we closed 2008 with a strong quarter for new business and we were reporting $0.32 of adjusted net income.

The business generated strong cash flow in the fourth quarter and through the year and we exited 2008 with an exceptionally strong balance sheet. Among the other positives this quarter, we reduced operating interest expense and strong growth in telematics hardware sold.

In addition, near the end of the quarter, we raised the fees we charged for late payments, helping to offset some of the increasing credit losses. We also paid down a significant amount of financing debt and we received a cash benefit from our hedging program.

That being said, we saw increasing headwinds as the quarter progressed. I will take some time to focus on each of these areas as well as provide some insights into our thoughts on 2009 after a quick review of our financial metrics.

For the fourth quarter 2008, total revenue decreased 11% to $80.9 million from $90.7 million in the fourth quarter of 2007. Net income to common shareholders on a GAAP basis was $65.2 million or $1.66 per diluted share. This compares with net income of $4.6 million or $0.11 per diluted share for Q4 last year.

The Company's non-GAAP adjusted net income for the fourth quarter 2008 was $12.5 million or $0.32 per diluted share compared with $19.7 million or $0.49 per diluted share for the fourth quarter last year. Adjusted net income excludes an unrealized marked to market gain on our derivative instruments as well as the amortization of purchased intangibles.

As Mike mentioned earlier, for the fourth quarter of 2008, we've also excluded a $1.5 million non-cash asset impairment charge related to the product development for the construction vertical. For the full year 2008, net income to common shareholders on a GAAP basis was $127.6 million or $3.22 per diluted share.

This compares with $51.6 million or $1.27 per diluted share for 2007. Again for the full year, adjusted net income on a non-GAAP basis was $74.1 million or $1.88 per diluted share compared with $76 million or $1.86 per diluted share in 2007. The 2008 figure also excludes the asset impairment charge.

Looking specifically at the Fleet segment, total revenue declined by 12% to $74.5 million in Q4 2008. The average number of vehicles serviced in Q4 2008 was approximately 4.6 million compared with 4.5 billion a year earlier.

Total transactions grew 6% in Q4 2008 to 66.9 million from 63.1 million in the fourth quarter last year. The majority of the growth stems from the Pacific Pride transactions. Excluding Pacific Pride, the total number of transactions was down nearly 4%.

With the lower price of fuel and declines in fueling volume, payment processing revenue in our Fleet segment was down 21% to $50.4 million from $64 million in Q4 last year. The number of payment processing transactions was down 4% compared to the fourth quarter of last year.

The average expenditure per payment processing transaction for Q4 2008 was down 16% from the fourth quarter last year to $52.69 due to the drop in fuel prices. Our net payment processing rate decreased 5 basis points in Q4 2008 from the prior year to 1.86%. Compared to the third quarter, our net payment processing rate was up 15 basis points, as we expected approximately 55% of our transactions in the fourth quarter were at merchants with hybrid contracts and we benefited from these arrangements in the fourth quarter.

Unlike the sequential third quarter of 2008 when higher fuel prices drove down the rates with some merchants, the lower fuel prices in the fourth quarter of '08 drove up our net payment processing rate sequentially due to the transaction fees embedded in our rates. Rebates as a percentage of fueling dollars paid to large fleets and leasing companies were flat compared to the third quarter.

The MasterCard segment contributed $6.3 million in total revenue in Q4 compared with $5.7 million in the fourth quarter of last year, an increase of 11%. Our single-use product made up the majority of the spending increase in the quarter.

The total purchase volume was $586 million which is up 21% from $484 million in Q4 last year. The growth in spend volume was offset in part by an increase in the rebates paid primarily due to mix.

Turning now to operating expenses, on a GAAP basis, the total for Q4 was $61.9 million. This compares with $51.1 million in the fourth quarter last year. We continued to refine our cost structure and with credit losses, the only notable exception, operating expenses were in line with last year.

I'll speak to credit loss first which on a total basis including both Fleet and MasterCard, was up $6.5 million from Q4 last year to $14.5 million. As Mike said earlier, our loss rate in the Fleet segment came in higher than the 40 basis points were projected for Q4 at 51 basis points. This rate was higher than anticipated due primarily to a large bankruptcy.

Our customers, like many other businesses out there, have experienced liquidity issues and cash flow shortages. In general, we continue to experience a very difficult collection environment and saw a decline in the amounts we were able to recover on previously charged off balances.

While the vast majority of our customers have continued to pay us on average in less than 30 days, we have seen increased loss rates as customers age into delinquent categories. To give you some perspective on collections, approximately 99% of our balances are current when adjusted for changes in fuel prices. On the accounts that have charged off, roughly 85% of the losses were less than $25,000 in size even with the one large bankruptcy loss.

Analyzing our portfolio as we continuously do, we've seen only a modest decline in credit quality today and we believe the fundamentals in the portfolio are reasonably solid. For the full-year 2008, we had 28 basis points of loss.

This is several basis points higher than our historical range of 11 to 22. Historically, credit losses tend to be higher in Q1 and Q4 each year.

We have adopted new credit scoring tools and taken some other steps to further mitigate credit risk including reducing the size of the credit lines we've made available to higher risk fleets, implementing new heavy truck fleet requirements and revising our policy on late fees. Our credit is not revolving credit but we do charge late fees to customers who don't pay us on time and we have adjusted our fees to increase the incentive for timely payments.

Looking forward, our guidance for the full-year 2009 assumes a prolonged recession and we anticipate further pressure on business which will impact the credit quality of the portfolio. Although we cannot predict how long the recession will last or how deep it will ultimately be, we are assuming that our losses for 2009 will be in the range of 45 to 55 basis points.

But while we're not able to exercise control over the macroeconomy or the credit markets in which we operate, we will continue to segment the portfolio and make adjustments to our credit and collection practices to try to limit our exposure. Let's now move onto other key expense lines.

Salary and other personnel costs were $16.9 million in the quarter, flat with last year. Our average headcount for Q4 was 704 compared with 693 in Q4 last year. The growth in headcount was related to our Pacific Pride and FAL acquisitions. Combined, these two acquisitions added 38 people to our headcount in Q4.

During the fourth quarter of 2008, we restructured our field sales organization and streamlined several administrative functions, eliminating 53 additional positions across the Company. We continue to expect the reorganization to generate approximately $4 million in annual savings going forward. We will continue to look at opportunities to streamline the organization throughout the year.

Salary expense for the fourth quarter includes a bonus expense for associates only, totaling $500,000. This award was discretionary and approved by our compensation committee to recognize solid execution in 2008. Looking ahead to 2009, we will be suspending all merit pay increases for the year but we will be continuing our short-term incentive grant program and adding stock options to our long-term incentive grants.

Moving on, service fees were up in the fourth quarter by $500,000. This increase is due to fees we paid to process MasterCard transactions and is in line with the increase in the spend volume. Our other expenses were up approximately $2.6 million, about half of which is telematic hardware expenses.

Depreciation and amortization expense is up by $1 million from last year due to $800,000 in amortization related to our acquisitions and $200,000 for new assets placed into service. As I mentioned, operating interest expense was a positive factor in the fourth quarter, declining by $1.7 million from Q4 a year ago to $7.3 million.

Our average operating debt level including CDs and Fed funds was $632 million compared to $586 million in Q4 last year. We use CDs issued by our industrial bank to finance our receivables.

For the quarter, the interest rate on our CDs and Fed fund borrowings declined approximately 17 basis points from Q3 to 3.9%. For the year 2008, our interest rate declined nearly 100 basis points.

We expect to continue to benefit from low interest rates in 2009. Our CD portfolio is continuing to roll over and approximately $212 million in CDs or one-quarter of the portfolio rolled over during the quarter.

We've approximately $230 million in CDs maturing within the first quarter of 2009. We continue to have excellent access for short-term borrowing to fund our receivable balances.

However, our receivable balances dropped by $670 million in the fourth quarter mainly due to rapidly declining fuel prices. As a result, we ended 2008 with significant cash balances as maturing CDs did not keep pace with the declining receivable balances. This temporary balance will diminish over the course of Q1 2009 as certificates of deposit mature.

Our effective tax rate on a GAAP basis was 37.1% for the quarter compared to 39.1% for Q4 a year ago. Our adjusted net income tax rate this quarter was 38.3% compared with 36.7% for Q4 2007.

Let's now turn to our derivatives program. During the fourth quarter, we recognized a realized gain of $800,000 before taxes on these instruments and an unrealized gain of $86 million. Reflecting the extraordinary decline in oil prices, we concluded the fourth quarter was a derivative asset of $49 million, a swing of $86 million from the end of Q3.

The bottom end of the collar that we have locked in for 2009 is $0.24 higher than the bottom end we locked in for 2008. Our weighted average prices locked in for '09 are between $2.79 and $2.84. Our guidance assumes an average fuel price of $1.97 for 2009, so we expect to receive significant cash gains from our hedging program in 2009.

For the portion of 2010 that we have completed hedging, which is approximately 50% of the full year's target, our average price is in the range of $3.39 to $3.45. As we announced in December, we have temporarily suspended new purchases of derivative instruments.

Looking at the current situation, world oil prices remain very low and our overall fuel price related earnings exposure has diminished as hybrid contracts have increased. Prior to our December announcement, we were targeting hedging 90% of our estimated fuel price related to earnings exposure for 2009 and we have partially hedged the first three quarters of 2010 with a target of 80%.

We expect that hedging will continue to be important to our business model going forward and we still intend to purchase derivatives in the future. But these purchases will not be made as far in advance as in the past.

Our reentry point will be reviewed on a quarterly basis. As I mentioned earlier, our accounts receivables balance net of reserves for credit loss decreased to $700 million from $1.1 billion at December 31, 2007 and more than $1.3 billion for the end of Q3, due primarily to the decline in fuel prices. There were similar decreases in our accounts payable which also reflected the drop in fuel prices.

We have about 3.5 years left on a revolving credit facility. We're currently paying a rate of LIBOR plus 58 basis points which is significantly better than the current market rate.

We had approximately $280 million available to us under this agreement as of the end of the quarter. We paid down $42 million in financing debt, ending the quarter at $171 million. We also repurchased 550,000 shares of stock, spending a total of $7.6 million in the quarter.

The resilience of our business model was demonstrated this year by our exceptionally strong free cash flow, which totaled more than $100 million for the year. We concluded Q4 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 will allocate our free cash flows with [best use] whether it's debt paydown, share buybacks, acquisitions or internal reinvestment. As Mike mentioned, in 2008 we used our cash flow pretty equally across all of these areas.

However, given the current economic conditions, the premium on liquidity in today's market and the absence of better alternatives, our leverage will likely remain below our target level temporarily and we will maintain a bias towards liquidity. Capital expenditures were $3.8 million for the fourth quarter, reflecting continued reinvestment in our core product offerings and strategic diversification.

In light of the slowdown in business volume this past year, we focused on reducing these expenditures wherever possible and for 2008, total CapEx was $16.1 million. Looking forward, our strong financial position will allow us to continue investing in our infrastructure and we anticipate spending 14 to $17 million in 2009. I will conclude with some key assumptions and financial guidance for the first quarter and full-year 2009.

We're assuming continued deterioration in the economy and therefore further declines in fuel purchasing volume through the year. Although we're planning on continued success in signing new customers and low attrition rates, we expect both these factors to be offset by a decline in transaction volume within our existing customer base of approximately 10 to 15%.

We have also assumed a significant year-on-year decline in fuel prices, substantially countered by our fuel price derivative instruments. For the majority of 2008, we were above the top end of our hedge collar, but we expect will be offering operating below the collar in 2009.

As a consequence, we expect to report realized cash gains this year as opposed to the realized losses we saw for most of 2008. At the same time, we're expecting to see some further erosion in the credit quality of our portfolio and a commensurate increase in charge-offs during the year.

For the full year, we expect credit losses to be in the range of 45 to 55 basis points. Let me remind you that our forecasts for the first quarter and full-year 2009 are valid only as of today and are made on a non-GAAP basis that excludes the impact of non-cash marked to market adjustments on our fuel price related derivative instruments, the amortization of purchased intangibles and adjustments related to the deferred tax asset and tax receivable agreement with our former parent company.

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

For the first quarter of 2009, we expect to report revenues in the range of 61 to $68 million. This is based on an average retail price of $1.98 per gallon. For the full-year 2009, we expect revenues ranging from 270 to $285 million based on average retail fuel price of $1.97 per gallon.

In terms of earnings for Q1 of 2009, we expect to report adjusted net income in the range of 10 to $12 million or $0.25 to $0.31 per diluted share. We expect adjusted net income for the full-year 2009 in the range of 51 to $59 million or $1.30 to $1.50 per diluted share on approximately 39 million shares outstanding.

I will now turn the call back over to Mike.

Thanks Melissa. Before we go to your questions, I would like to close with some thoughts about the year ahead.

In developing the guidance that Melissa outlined, we made what we believe are reasonable assumptions about the economy and its potential impacts on our business. Given the extraordinary uncertainty right now, we think we're being realistic by planning for lower transaction volume in a challenging bad debt environment in 2009.

On the upside, we will continue to generate significant cash flow while the country is in the middle of a recession. We will have the advantage of a full twelve months of Pacific Pride versus 10 months in 2008 along with the full year's benefit from the GSA Fleet and the potential for approximately 2 million additional transactions from the large new portfolio we will be adding with Citi.

We signed a new contract with Citi and expect the portfolio to be onboard by the end of the second quarter of '09. This will be a fully funded program similar to other private-label portfolios which have no revolving credit component.

We're continuing to look at ways to improve productivity across the organization and take additional costs out of the business. In addition, as Melissa said, our '09 financial results will reflect hedging at higher prices than last year.

I spend a considerable amount of time with our associates and as we begin the new year, I can say that our people are highly energized, not only to outperform the economy, but to capitalize on the competitive advantages that we have and increase our market share at a very challenging time. If you compare us with others in our space, not only do we continue to deliver great value and high-quality service to our customers, but our leverage ratio is low and we're strongly positioned in having an industrial bank to fund our receivables at competitive rates.

So if you step back and look at Wright Express today, we're profitable and financially strong. The quality of our credit portfolio and the way it's being managed are both very high and we continue to have great confidence in our business model.

We're hitting our targets for adding new vehicles and controlling attrition, and the diversification strategy we embarked on two years ago is driving new and growing streams of revenue. Our goal as we begin 2009 is to build on these strengths and maximize the results we produce even in difficult market conditions.

We are continuing to invest in our growth strategies and in our people. I'm confident that Wright Express will be positioned for industry-leading growth when the economy turns around.

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

(Operator Instructions) Tien-tsin Huang, JPMorgan Chase & Co.

Just a few questions. First on the payment processing rate, that came in higher than we expected which is great. What is the new rule of thumb now that we can maybe use for changes in fuel price and how that might influence the discount rate?

Sure, the last thing that we published would show a $0.10 change in fuel prices, about a $0.10 change in earnings for 2008. It's a little bit less than that now with the hybrids in place. So we're getting a bit of a buffer from that and that is obviously unhedged.

Right, I'm sorry if I wasn't clear. The payment processing rate, the discount rate, the sensitivity of that to changes in the spot fuel prices?

It is about a $0.15 change is about a 1 basis point change in the rate.

$0.15 is -- okay, got it. And then just a couple more just on the funding side, funding costs. What are you assuming in your outlook on the funding side? Can you give us some more guidance on that Melissa?

Yes, we are presuming they're going to continue to fund through our broker CDs and our Fed funds. Through the end of the first quarter, we think we're going to have more CDs as they continue to roll off and we reduce those cash balances.

So we won't see a significant change in rates in the first quarter to what we have in Q4. So that point forward -- current rates right now are between 1 and 3% on CDs and I said that in fourth quarter for us, it was about 3.9%. So we should see some significant declines in Q2 and going forward for the rest of the year.

Good, last one, then I will jump off. The personnel expenses, what is a good run rate to assume here coming off of Q4 level? I know that we have some Citi ramp-up as well and you've got the risk too. So I just want to make sure we have got the right run rate.

Yes, we are presuming the year to have a similar number of average rate sources as where we are ending 2008, so some pluses and minuses. And if you look at our salary costs for the fourth quarter, there is a couple of things that will change.

We had a charge of $250,000 associated the risk included in that. There is also that onetime bonus of $500,000 but it's excluding our ongoing [STIP] which is a little over $1 million in the quarter. Those three things are going to be kind of onetime unusual adjustments. But the run rate on people should be similar to Q4.

Sounds like it probably shouldn't change too much then, right? Given those pluses and minuses and Citi coming aboard?

Yes, I think that is fair.

Thanks so much.

Anurag Rana, KeyBanc Capital Markets.

Good morning everyone. Melissa, could you please give us a little more details on the free cash flow which seems a bit high in this quarter? And what kind of free cash flow should we assume for '09?

Yes, in the fourth quarter because fuel prices declined as rapidly as they did, it allowed us to dividend more money up from our industrial bank. We have to keep a percentage of their assets in capital.

And that really drove the increase we saw in the fourth quarter. On a normal basis, assuming flat fuel prices, the amount that we're throwing off in adjusted net income which should translate to what you would see in cash flow in the course of the year, and that has been true historically on average since we have been public.

Great and on the low end, it assumes to be somewhere around $50 million. What do you intend to do with that free cash flow in 2009?

Yes, we have talked about continuing to look at the areas where we have invested in the past. We still have $70 million authorized on our share repurchase program and we will continue to look at that as an option.

You can see that we had a bias toward paying down debt. That will continue to be an area that we are going to look at. And then obviously acquisition opportunities, we think that the market is -- there is opportunity out there and that is an area we would be interested in as well. Since we have been public, we have gone roughly one-third, one-third, one-third in each of those things.

Thanks, any new portfolios that might be coming on board that you are aware of at this time?

No, there's nothing at this point that we would say is imminent except for the one that we have talked about which is the new Citi agreement that will bring on the private-label portfolio in the second quarter.

Thanks and lastly, could you please give us any more details on some of the new current policies that you have implemented over the last few quarters? Thank you.

Sure. One of the ones we have implemented earlier in the year, we saw significant losses in relation to the size of our accounts in some of our heavy truck customer base. So we changed payment term requirements within that part of our business.

We have also across the board gone through each quarter and looked at the amount of credit that we have outstanding. We look at things based on the risk rating and have restricted credit through the higher risk accounts.

On an annual basis, we are reviewing accounts and looking at whether or not anything has changed or deteriorated within the customer population for our larger accounts. So we are continuously evaluating that.

The late fee change that we have made really isn't -- it's not a change (inaudible) our credit policy, but we wanted to make sure that we had as much incentive in place as possible to deter late payment. So it has been a whole host of different things. In general, we will continue to look at post-mortem on any of the losses we have that are more significant and we make minor changes along the way in our collection and credit practices.

Paul Bartolai, PB Investment Research.

Thanks, good morning. Just on the loss ratio in the fourth quarter, so excluding the one big bankruptcy, would those have been in the 40 basis point range in the fourth quarter?

It would have been the 40s, yes. It would've been above 40 though.

Okay, so you are just assuming some continued deterioration in 2009 from Q4 levels?

Yes, we presumed a couple of things. We are presuming Q4 and Q1 are normally high points and we are presuming that to be true again in 2009 and we are also presuming the fourth quarter we had a higher loss. We are presuming we're going to have higher onetime losses in each of the quarters, just as a planning assumption right now.

Okay. And then as you look at the 10 to 15% expected decline from existing customers, anyway you you could give us any more color on that? Which parts of the portfolio is that coming from? Is that more to do with some of the bankrupt customers going away? How are you looking at that and kind of what is driving that?

Paul, there's a couple of things. What we're seeing just first of all big picture is the existing customer base is just contracting. So you know, a 10 vehicle fleet is now a nine vehicle fleet.

We are also seeing the vehicles they have left are buying on average less fuel on average per vehicle than they were before. But we have seen across most of our [SIC codes] the contraction. It's primarily in areas like construction, some of the special trade contractors, wholesale trade, durable goods.

If you look at it geographically, probably more so on the East Coast than the West Coast; a little bit of upside in business services and a little bit of upside in the Gulf Coast with business services and oil and gas customers. But it's really just they're contracting with business slowdown is the primary issue.

Okay, great. And then you talked a bit about the new business momentum still being relatively good. You know, you obviously have the big GSA contract in '08.

If you kind of strip that out and kind of look at over the course of the year, are trends still pretty favorable? Are you comfortable with kind of the value proposition and kind of what are you hearing from customers as you go out and try and sell them on the product?

We're still very bullish, as we said. Even if you take out the GSA, we added significant new vehicles last year. There is still strong demand for the product.

We're seeing as we said, strong demand for the WEXSMART telematics product, another way for fleets to control their expenses. So our pipeline is strong going into this year. So the value proposition is still something that is going to sell. We believe we are going to see good results on our front end this year as well.

Tim Willi, Avondale Partners.

A couple of questions. First with the industrial loan bank, is there anything around FDIC premiums or anything given all that's going on with the banking industry that you have heard or would expect? (inaudible) some talk potentially of premiums going up on deposits. I'm not sure about that. Is there anything there we should think about in terms of that entity?

We have seen an increase in the premiums that we're getting charged for FDIC insurance because the asset base is declining in 2009, the increase in premiums being offset by the reduced asset base. So it's really having a material impact on comparability from year to year.

From a regulatory perspective, I think we would presume we're going to see increased regulatory scrutiny like we're seeing in a lot of areas. But we don't expect at this point to have much of a financial impact on our business model.

Second question just around fleet growth and then sort of just the comments you've made in response to earlier questions and your comments around the state of your customers. Outside of general business slowdown, which is clearly obvious, is there anything that you've sensed that small businesses have clearly been hurt by more restricted credit and it's translated into the impact on your business, if there were some kind of fix for the banking industry?

There was a lot of talk yesterday about trying to get credit to small businesses et cetera, that that could have some kind of potential positive impact for your Company. Just trying to sort of separate what might be general macroeconomic versus somebody can't get a $75,000 line of credit to stay in business and keep moving forward.

I think what you just said is what we are hearing from customers where losses as I said earlier are predominately less than $25,000. So it's really coming from small business. And bankruptcies have increased and what we're hearing from them is liquidity issues.

In some cases, it's just general slowdown in their business itself but some of it is their inability to secure liquidity or when they can at rates that they can't stay in business. So I think it has had an impact historically or at least the last couple of quarters. And going forward, you know, if that loosens, I would expect that is going to have a beneficial impact on us.

Okay and then the last question on credit. I think on the third-quarter call you had talked about the big truck category, while a smaller part of the business, probably I think you had called out the credit deterioration there as pretty notable and you put these programs back in place in the quarter. I was just curious, did you see any kind of improvement with credit and collections in the big truck sector after making those changes or has it continued to sort of move at the same pace?

I would say there's two parts to that response. When we have added new business, we have added it in different payment terms and so that has reduced our exposure. When we have gone back to existing customers in that particular segment and changed payment terms, we have seen not a significant impact on our losses.

I think those customers in particular are experiencing the higher level of cash flow shortages right now. And so, a change in payment terms which requires them to accelerate a payment has a negative impact that is offsetting any pickup we're getting based on a reduced exposure.

Robert Dodd, Morgan Keegan.

One housekeeping one first. The $1.5 million non-cash charge, can you tell us which line item or line items that was embedded in?

Sure, it's in occupancy and equipment.

Got it. One of the comments you made was about 99% of your customers are still covered -- adjusted for gas prices. You have only got 1% of your customer base delinquent is what it sounds like now. Can you compare that if you have the data to, what was a typical kind of level in the '03 to '05 period and then maybe what you saw back in 2001?

I don't have 2001 data with me, but it's been pretty standard for us to be around 99% level. It's not dramatically different. What we have seen even through the course of 2009 is current customers if anything are a little bit more current and the ones that have aged out and historically paid us but just paid us more slowly are the ones that are more likely to now become delinquent.

It is -- you know, as you talk about, it's really a collections issue more than an increase in delinquencies?

Yes and actually even if you look at it from a risk perspective, look at the portfolio, we rank it based on risk rating. If you look at that year-over-year December '08 to December '07, there's not significant changes in the overall risk ratings. It's just the ones that are higher risk are having more trouble.

Got it. One of the other thing you highlighted was small fleet grew 1% in the year, yet it looks like most of your failures where they're occurring, customer failures, are very much in that small fleet area, sub $25,000 in charge-offs.

Can you give us an idea of kind of the growth versus net growth in your small fleet customers? You seem to be doing a pretty good job growing new customers but then also you're losing some out the back door. Can you give us any color there?

That would be where we see higher involuntary attrition, would be in that customer base. And our involuntary attrition Mike said was 3.8% for the quarter. That's going to be largely in that small fleet category.

But even the voluntary attrition would be higher with small fleet as well, just knowing some of the portfolios on the private label side if they're closing stations or things like that that impact us. So we see it both from a voluntary and involuntary standpoint.

Got it. One last question. On the hedge, I assumed 18 months ago when you were putting the '09 hedge in place, you were not presuming the level of economic deterioration that we are seeing right now.

So would that imply essentially that you overhedged in terms of the number of gallons covered? Because if the same store kind of volume growth of your customer base is going to be down 10 or 15%, I assume you did not build that in. Are we going to see any abnormal hedge mismatches in any parts in '09 or is that all kind of washing out with GSA, Citi, et cetera, et cetera?

Yes, when we purchased the hedge, we used pretty conservative assumptions on growth and historical costs associated with changes in fuel prices, which includes credit loss. Obviously there's been a lot of changes to those assumptions since we made the purchase.

So based on our current assumptions for 2009, we would have more than 90% hedged; pretty early to tell and then we have to go through the year and see how things actually perform. Right now that's an advantage to us because still prices are low.

Tom McCrohan, Janney Montgomery Scott.

Melissa, what was the normalized cash on hand if you adjusted that for the CDs that did not mature?

It was about $40 million.

About $40 million. Okay. And just to clarify on the transactions, the payment funded transactions coming from the GSA. I had in my note $7.5 million payment transactions from that government contract. Is that right?

Yes.

Yes.

Did I hear you, Mike, Citigroup -- I had in my notes $4.5 million of payment funded transactions from Citi this year or is it lower?

Well that's an annualized number. So it will be closer to $2 million for the year. 4.5 is an annualized number.

Okay so just kind of ramping that up.

Right because we'll only get started in probably the latter half of the second quarter.

And did you disclose the dollar amount of the dividends from the industrial loan bank this quarter?

It was about $65 million.

$65 million. Okay. Thanks very much.

Bob Napoli, Piper Jaffray.

Good morning everyone. This is Jason Deleeuw calling in for Bob. I was wondering what transaction trends you're seeing from your installed base in the month of January relative to December?

We're pretty much seeing, as we said, 9% was the drop-off in December and we are predicting the 10 to 15%. So so far what we have seen this year in the first part of this year is pretty much in that range of 10 to 15% drop-off, probably on the lower end though.

Thanks and on then on the rebates, they were -- I think you said they were flat in the fourth quarter versus the third quarter. Can you just speak to that in terms of customer mix? Are there just fewer large fleet being signed up? Could you speak to the competitive environment in winning fleet?

I think we're not -- well we negotiated a lot of -- we talked about last quarter some of the co-brand relationships and the large fleets. So that's pretty much stable at this point.

But new large fleet business will continue to be competitive. So we know there's going to be competitive impacts on our rebates and we still have to give rebates in the large fleet marketplaces. But it's now at a very ratable level and it's not growing significantly.

So we would expect those pressures to be less than what we saw in '08 through the course of the year?

Well what you saw was increased pressure particularly when fuel prices were escalating. So there was more pressure in the middle part of the year, in the second and third quarter. I think as Mike said, we have always presumed there's going to be some continued increase in rebates overall over a period of time. But you just thought it would be more ratable in part of this year.

Okay thanks and then just the last question is on Citi. They've taken a look at all their businesses and the private-label business and I was wondering if you guys are anticipating any impact from Citi's actions on your contract that you anticipate coming on in the second quarter?

No we don't because we will basically be taking over the management of that portfolio on behalf of Citi. So we will be funding the receivables and managing all aspects of the relationship on behalf of Citi if you will in this relationship with an oil company.

Thank you. It appears that there are no further questions, therefore I would like to turn the call back over to you for any closing remarks.

Well thank you, Jackie, and thanks everyone for listening. We apologize again for that brief power outage we had. Apparently a telephone pole went down nearby us but we're back up and running. Anyway, we look forward to talking to you again next quarter.

That concludes our conference call. Thank you for joining us today.