WEX Inc (WEX) 2009 Q1 法說會逐字稿

Good morning everyone and welcome to the Wright Express Corporation first quarter 2009 conference call. There will be an opportunity for questions after the prepared remarks. (Operator Instructions)

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 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. This was a very positive quarter for Wright Express with adjusted net income coming in much better than anticipated. We had planned for lower transaction volume and a challenging bad debt environment in Q1 and through the year. When we gave our original guidance we expected a continuation of the trends we were seeing in our business in December '08 and January '09.

Based on the run rates we were seeing at that time, we assumed 45 to 55 basis points of credit loss along with 10% to 15% lower fueling volume in our installed base. Since mid February, however, we've seen a marked improvement in the collections environment. Fleet credit loss came in at 17 basis points, which is back within our historic range, and this was the most significant favorable factor in our Q1 results.

As we expected, we continue to see year-on-year erosion in fleet activity in both the number of active vehicles and transactions per vehicle within our installed base. In Q1 existing customer fueling volume was down about 10% from the first quarter of '08. Total payment processing gallons were down 6% from Q1 last year.

Looking ahead, we need to see another solid quarter for credit and some improvement in volumes before we can say business trends have bottomed. That being said, we believe that our business model is more resilient and stronger than other companies in our space. This positions us to compete aggressively as we go forward even if the overall economy remains challenging.

Looking at our headline financial results, first quarter revenue of $69.2 million exceeded the high-end of our guidance range, as did adjusted net income, which came in at $0.42 per share. Our revenue for the first quarter exceeded guidance as a result of an increase in late fees, along with slightly higher price of fuel, and better than anticipated pricing results.

We continue to look for opportunities to take costs out of the business, but the decline in operating expenses we saw this quarter was largely attributable to lower bad debt expense. Our prior guidance for 2009 assumed a major bad debt each quarter, and we did experience a large customer bankruptcy in Q1 in our MasterCard segment.

The key upside factor versus our forecast was a favorable trend in the receivable ageing. While net charge-offs during the quarter were inline with our forecast, the receivables ageing showed a significant and across the board improvement. Some of this was probably due to the economy, however, we believe much of it is also reflected -- reflected the impacts of practices we put in place over the past year to minimize bad debt and increases in the late fees we assess. We're maintaining a high-level of vigilance in this area, and Melissa will provide more detail on credit loss in her remarks.

On the front end of the business, our fleet sales group started the year very slowly in January, but new business picked up toward the end of February and has improved steadily since then. We are not ready to call this a trend, but our collectors and people in sales are saying essentially the same thing. There was a better tone to the customer interactions and prospective customers are generally more optimistic. That's very different from what we were hearing back in October, November, December, and January.

In addition to the good performance in the customer acquisition, we saw the full impact of the federal GSA Fleet portfolio in the quarter. With GSA Fleet onboard, the average number of vehicles serviced in the mid and large size fleet market was up 11% from the first quarter of '08.

In small fleets, the number of vehicles overall declined 2% year-on-year, reflecting the weak economy. Looking at our small fleet results by channel, in the Wright Express Direct Channel, the average vehicle count was up 1% from Q1 of '08.

In private-label, the number of small fleet vehicles was down 5% from a year earlier. As a reminder, these comparisons reflect the underlying attrition in our existing customer base partially offset by new vehicles added on the front end.

In our heavy truck private carrier fleet segment, the vehicle count was also down 2% from the first quarter a year ago. Some of these declines were a consequence of the aggressive credit and collection actions we have taken in this sector. Overall, our average vehicle count was up 6% from the first quarter of '08.

The tougher business environment for fleets has actually strengthened the value proposition we deliver to customers. As a result, our attrition rates remain low. Voluntary attrition for the first quarter was 2.6% compared with 1.4% for Q1 last year. Although voluntary attrition was up both year-on-year and sequentially, it was below our target of 3%, and similar to our experience prior to the current recession. Our involuntary attrition also tipped up slightly as we became more restrictive with our credit policies for our riskiest customers.

Our sales pipelines are strong as we begin the second quarter. We have implemented the new portfolio with Citi which should be fully ramped by the end of the second quarter. Citi will bring 2 million additional transactions this year, and that will impact small fleet sales especially private-label.

When considering our diversification strategy in the aggregate, our MasterCard, TelaPoint, Pacific Pride, and Telematics businesses continued to grow in Q1 compared to the prior year, both in terms of dollars contributed and as a percentage of the overall top line. Purchase volume in our MasterCard was up 23% from the first quarter of 2008 to $649 million. Our travel industry customers continued to grow and exceeded our expectations.

In our WEXSMART business, activity improved towards the end of the quarter after a slow start to the year. What we're hearing from the Telematics sales group and seeing in increased response rates suggests the trend is improving as we begin the second quarter.

Our Pacific Pride and TelaPoint acquisitions performed inline with our expectations this quarter and we're looking forward to good results from these businesses for the full year.

Our new international business is developing well. We're working to forge private-label processing relationships with the international oil companies that have moved to managing their fleet car portfolios on a global basis. This is a long-term effort, but we're making nice progress.

Overall, we feel very good about the investments we've made in diversifying our revenue. These businesses have clearly helped us weather the economic storm this past year by continuing to grow at a time when our Fleet customer base activity was contracting.

In total, our diversification plays contributed $10.8 million in revenue in the first quarter, up from $8.2 million in Q1 of '08. This represents 16% of total revenue in the quarter, up from 9% last year, and we expect this growth to accelerate as we move through 2009.

We're looking for additional opportunities to diversify our top line and strengthen our business, and we're fortunate to have a strong balance sheet as we do so. Our business model continues to generate significant cash flow, which enabled us to pay down $34 million in financing debt this quarter and conclude Q1 with a low leverage ratio of 1 times EBITDA.

The Company's overall liquidity remains excellent, and given the economic environment, we are still being conservative with our cash. Having said that, our policy regarding alliances, mergers, and acquisitions has not changed. We are continuing to consider deals that can accelerate our overall growth and/or enhance our strategic position.

In fact, we believe that today's landscape is becoming more favorable for these opportunities. We expect valuations to eventually be more attractive and we are exploring opportunities that will enable us to penetrate adjacent markets, diversify our products, or aid our international strategy.

At the time of our last conference call, the entire the economy seemed to be in jeopardy and the trends in our business were unfavorable, and today the environment is still very uncertain. Can we say we've seen the bottom in the core fleet business? Our guess is not yet. Our visibility isn't much better than it was three months ago. Activity levels in our existing customer base fluctuated during the first quarter and turned slightly down again in March when compared to February.

We are also beginning to see divergence in customer behavior based on SIC codes for the first time. For example, there's been an increase in activity in public administration which we would expect with all the federal stimulus money, but we are also seeing a larger decline in retail, which is in line with lower retail sales around the country.

We did not see this type of divergence in activity until Q1 and we are monitoring it closely. Still, our business model is performing well at a very challenging time. We've been able to take advantage of our strong competitive position and increase our market share with the GSA and Citi coming onboard.

Every company in the fleet card business is feeling the impact of existing customers reducing their volume, as well as higher risk on bad debt. But compared with the rest of the industry, we have a unique combination of strengths including front end sales growth, increasingly diversified revenues, low attrition rates overall, strong capital structure, liquidity and cash flow, a promising international business, as well as a lift from our fuel hedge. We look forward to further capitalizing on these advantages as the year unfolds.

I'll now turn the call over to our CFO, Melissa Smith, for the financial review and then we'll take your questions.

Good morning everyone. We're reporting $0.42 of adjusted net income for Q1, clearly a stronger result than our anticipated guidance range of $0.25 to $0.31 of ANI. As Mike mentioned, the quarter was largely in line with our guidance with the exception of our provision for credit losses. In addition, there were some positive revenue variances such as late fees and better than anticipated pricing results.

Operating expenses were lower than our forecast. However, based on our strong financial results for the quarter, we did accrue bonuses in excess of our target. The business generated strong cash flow in the first quarter which allowed us to pay down a significant amount of financing debt. This further strengthened an exceptionally strong balance sheet.

We feel that we have executed well in a difficult environment, especially in the credit and collections area. We're cautiously optimistic about the change in tone we're hearing from many of our customers; however, we understand that we remain in largely uncharted economic waters and we continue to execute with a degree of conservatism as we progress into the year.

I'd like to continue with a quick review of our financial metrics and provide additional color on credit losses for the quarter. In addition, I'll be providing you with updated guidance for 2009.

For the first quarter of 2009, total revenue decreased 26% to $69.2 million from $92.9 million for the first quarter of 2008. Net income to common shareholders on a GAAP basis was $11 million or $0.28 per diluted share. This compares with net income of $14.5 million or $0.36 per diluted share for Q1 last year.

The Company's non-GAAP adjusted net income for the first quarter 2009 was $16.3 million or $0.42 per diluted share compared with $17.4 million or $0.44 per diluted share for the first quarter last year.

Adjusted net income excludes an unrealized mark-to-market loss on our derivative instruments, and the amortization of purchase intangibles. In addition, it also excludes a non-cash asset impairment charge and a small net amount for adjustments to our deferred tax asset and related liability to our former parent company. You will see all of these items on the reconciliation we provided with our press release.

Looking specifically at the Fleet segment, total revenue declined by 28% to $62.5 million in Q1 2009. The average number of vehicles serviced in Q1 2009 was approximately 4.7 million compared with 4.5 million a year earlier. Total transactions declined 2% in Q1 2009 to $63.3 million from $64.8 million in the first quarter last year.

Q1 reflects a full quarter of GSA and Pacific Pride transactions. Excluding Pacific Pride, the total number of transactions was down nearly 8%.

With the lower price of fuel, and declines in fueling volume, payment processing revenue in our Fleet segment was down 40% to $39 million from $65.1 million in Q1 last year. The number of payment processing transactions was down 7% compared to the first quarter last year. The average expenditure per payment processing transaction for Q1 2008 was down 38% from the first quarter of last year to $40.78 due to the drop in fuel prices.

Our net payment processing rate increased 7 basis points in Q1 2009 from the prior year to 1.94%. Compared to the fourth quarter, our net payment processing rate was up 8 basis points.

As we expected, approximately 65% of our transactions in the first quarter were at merchants with hybrid contracts and we benefited from these arrangements in the first quarter. Similar to last quarter, lower fuel prices drove our net payment processing rate up due to the transaction fees embedded in our hybrid contracts.

Rebates as a percentage of fueling dollars paid to large fleets and leasing companies were up compared to the fourth quarter primarily because of the GSA business. The MasterCard segment contributed $6.6 million in total revenue in Q1 compared with $5.9 million in the first quarter last year, an increase of 12%.

Our single use product made up the majority of the spend increase in the quarter. The total purchase volume was $649 million, which is up 23% from $526 million in Q1 last year. The net interchange rate in the MasterCard segment was down 6 basis points sequentially. The majority of the decline is tied to a new three year contract we signed with one of our largest customers.

Turning now to operating expenses, on a GAAP basis the total for Q1 was $49.9 million. This compares with $55.9 million in the first quarter last year. We continued to refine our cost structure and primarily due to losses -- lower credit loss, operating expenses came in 11% less than the same period last year. On a total basis, including both Fleet and MasterCard, credit loss was down $6.2 million from Q1 last year to $4.2 million.

Over the past couple of months the tone of collection calls with our customers has improved. We hear less and less that they're unable to pay their bill. This is very different from what we were hearing in the latter part of 2008.

As Mike discussed earlier, our loss rate in the Fleet segment came in significantly better than the 45 to 55 basis points we projected for the full year, at 17 basis points. In addition, the 17 basis points this quarter was below last year Q1 rate of 28 basis points.

We use a roll rate methodology to calculate the amount necessary for our reserve balance. This methodology takes into account total receivable balances, recent charge-off experience, and the dollars that are delinquent to calculate the total reserve. This calculation is further augmented by a detailed review of the portfolio and anticipated charge-offs.

The expense we recognized in the quarter is the amount necessary to bring the reserve to its required level after charge-offs. Both total receivable balances and charge-offs were in line for the amounts we expected for the quarter, so they did not have a significant impact in the amount of the reserve necessary. However, we saw a dramatic improvement in the ageing of the portfolio, which was the primary driver of the reduced expense compared to our expectations.

Once a balance moves into a delinquent category, there are only three potential outcomes. It charges off, it continues to age, or it gets collected. The total dollars in our portfolios that were delinquent in Q1 were down more than $11 million, or more than 50% from Q4.

This is a reflection of our success in collecting older balances across the board. The first question is, what did we do to see such improvements? In addition to the prevailing economic conditions this quarter, we've been taking a number of measures over time to help mitigate our credit loss. It's not that a single magic bullet has reduced the expense, but a series of actions that have accumulated to make a significant difference.

Over the course of the last year, these actions included restricting new credit terms for certain industries, shortening payment terms and getting cash security for high risk customers, and systematically reducing credit lines on thousands of accounts. More recently, we've been contacting delinquent customers more frequently, partially through the use of collection agencies. And for higher risk customers, we've been suspending their accounts quicker if they fail to pay an invoice on time. And finally, we increased the late fees charged to delinquent customers to encourage timely payments.

As a result of all of these actions, we have seen an uptick in our involuntary attrition rate. This quarter we also benefited from higher recoveries of previously charged-off amounts and fewer bankruptcies than we anticipated.

The second question to ask is if this will continue. If you look at our entire credit portfolio the fundamentals remain very solid and we're pleased that our overall portfolio score improved during the quarter. We are remaining cautious, however, regarding the near turn economic outlook, and the continued efforts -- and the continued effects of the economy on our customers.

The results this quarter were very positive and we expect the actions we have taken to continue to mitigate losses in the figure. However, it's too early to fully project these positive results for the rest of the year.

Looking forward, we are adjusting our guidance for the full-year 2009 to reflect the upside in credit we experienced in the first quarter and the more positive trends we're beginning to see.

We have very limited visibility into how long the recession will last, or how deeply it will affect our customers. As the year progresses, 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 on to other key expense lines. Salary and other personnel costs were $17.9 million in the quarter, up approximately $700,000 from last year. This increase was due to an accrual for our short-term incentive program. Payouts under the program are based on financial performance for the year.

Our average headcount for Q1 was 708. This is essentially flat compared to last year even though the acquisitions of Pacific Pride and FAL added approximately 40 people. We eliminated 12 FTEs since the beginning of January. This is in addition to the positions we eliminated in Q4. We will continue to look at opportunities to streamline the organization throughout the year.

Moving on, service fees were up in the first quarter by $1.3 million. Approximately $300,000 of this increase is due to additional telematics units sold in the quarter. The remainder is an increase in fees related to our MasterCard program.

Occupancy and equipment costs were up by $536,000 due primarily to the impairment charge I mentioned earlier, which was $421,000 related to internally developed software. Depreciation and amortization expense is up by $754,000. Approximately $400,000 of the increase is amortization related to our acquisitions, and the remainder is for new assets placed into service.

As I mentioned, operating interest expense was a positive factor in the first quarter, declining by $4 million from Q1 a year ago to $4.8 million. Our average operating debt level including CDs and Fed funds were $427 million compared to $592 million in Q1 last year. We use CDs issued by our industrial bank to finance our receivables. For the quarter, the interest rate on CDs at Fed fund borrowing was 3.9% which was down from 5% in Q1 last year. Rates on these CDs are currently as low as 70 basis points for three month maturities. These low rates will average into our overall portfolio as we issue new CDs.

We continue to have excellent access for short-term borrowings to fund our receivable balances. Our receivable balances dropped by $9 million in the first quarter, and our cash balance dropped approximately $160 million mainly due to over $200 million of CDs maturing during that first quarter. As a result of the drop in debt levels, our operating interest expense will continue to decline in Q2.

Our effective tax rate on a GAAP basis was 36.9% for the quarter, compared with 37.9% for Q1 a year ago. Our adjusted net income tax rate this quarter was 37.8% compared with 37.5% for Q1 2008.

You also see that we adjusted our estimate as a deferred tax asset and related liability to Avis during the quarter due to state tax changes. The net impact of this was approximately $50,000.

Let's turn now to our derivatives program. During the first quarter we recognized a realized cash gain of $7.1 million before taxes on these instruments, and an unrealized loss of $6.5 million. Oil prices have remained stable during the first quarter, and we have not entered into any additional derivative instruments during the quarter.

We concluded the first quarter with a derivative asset of $42.8 million. Our weighted average prices locked in for '09 are between $2.79 and $2.84. For the portion of 2010 that we've completed hedging, which is approximately 50% of the full year's target, our price is approximately $3.40. The current market price for 2010 is approximately $2.16. Taking that and blending it into our prices we have already hedged, that would give us an effective price of approximately $2.78 for the year.

We targeted hedging 90% of our estimated fuel price related 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. Because of the hybrid contracts we've entered into, we have significantly reduced our exposure to fuel price volatility. Our reentry point will be reviewed on a quarterly basis.

We have about three years left on our revolving credit facility. We are currently paying a rate of LIBOR plus 58 basis points, which is significantly better than the current market rates. We had approximately $313 million available to us under this agreement as of the end of the quarter.

We paid down $34 million in financing debt in Q1, ending the quarter with a balance of $136.6 million. We concluded Q1 with a leverage ratio of approximately 1 times EBITDA. This is considerably lower than our target of between 1.5 and 2 times EBITDA for the long-term.

In 2008, our use of cash was pretty equally distributed between paying down debt, share repurchases, acquisitions, and internal reinvestment. As Mike said, we could be approaching a point where the M&A environment looks more favorable. For the near-term, however, our leverage will likely remain below our target level. We will maintain our bias towards liquidity.

Capital expenditures were $4.3 million for the first quarter reflecting continued reinvestment in our core product offerings and strategic diversification. For 2009 total CapEx is expected to be between $14 million and $17 million.

I'll conclude with some key assumptions and our updated financial guidance for the second quarter and full-year 2009.

Our guidance continues to assume a year-on-year decline in transaction volume within our existing customer base of approximately 10% to 15% due to the economic conditions. With the remainder of 2009, we expect we'll be operating below the hedge collar. 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 our credit loss to be in the range of 25 to 35 basis points based on our experience in the first quarter and the recent trends we are seeing.

Let me remind you that our forecast for the second 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 mark-to-market adjustments on a 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 second quarter of 2009 we expect to report revenues in the range of $66 million to $72 million. This is based on an average retail fuel price of $2.14 per gallon. For the full-year 2009, we expect revenues ranging from $277 million to $287 million based on an average retail fuel price of $2.10 per gallon.

In terms of earnings, for Q2 of 2009, we expect to report adjusted net income in the range of $15 million to $17 million, or $0.38 to $0.43 per diluted share. We expect adjusted net income for the full-year 2009 in the range of $59 million to $67 million, or $1.50 to $1.70 per diluted share on approximately 39 million shares outstanding.

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

(Operator Instructions). Your first question is coming from Tien-tsin Huang, of JPMorgan.

Thanks, good morning. Appreciate all the disclosures, really useful. I'll ask about the discount rate first. That was higher than we modeled. Heard a little bit of detail there, but was there anything unusual in there? Didn't sound like anything on the rebate side, and I guess I wanted to understand, this is right run rate to assume going forward.

Well, I think as we said in the remarks, with the lower fuel price, the hybrids helped us.

Yes.

We have negotiated a few new ones which the hybrids give us relief on the downside, gives the oils some relief on the upside, so some of those kicked in and came in better than we thought. And then even though we said rebating was up based on what were forecasting, it was still slightly below what we had forecasted even though we knew the GSA was going to kind of increase it. So on the rebate side it wasn't as bad of a quarter as we initially anticipated.

Is there a new sensitivity now that we should consider to the discount given certain changes in spot fuel prices?

At $2.00 a $0.10 change in the price of gas is about 2 basis points to the rate.

$2.00/$0.10 change, got it. And then the -- okay yeah, so there's a little bit of a change. And most of the repricing in the portfolio, the bulk of that is done right, Mike and Melissa?

In terms of the merchants?

Yeah, going through with the merchants, correct.

Yes, I mean, there's always some going on, but I think we had worked with a number of the majors, so I think any changes from this point would not be material to the rates.

Excellent, and then just the timing on the Citi conversion, and just a reminder of the transaction. I think you said 2 million, and then just the expense impact as we roll into 2Q. I just want to make sure we're modeling that correctly.

Yeah, the Citi portfolio, you got it right. It's 4 million transactions annualized, 2 million transactions is what is in our guidance and forecast for this year. It's about 100,000 cards. It's a funded portfolio, so I think it'd be very similar to other funded portfolios that you model today.

And to answer your question about costs. It will be relatively neutral to the year because we will have some costs in Q2 related to the conversions, so yes, a few hundred thousand.

Okay, great, thank you.

Thank you, our next question is coming from Anurag Rana of KeyBanc Capital Markets.

Good morning everyone. Congratulations on a good quarter. Mike I think it's prudent not to call the bottom in your end markets given an uncertain economic outlook, but just wondering what made you reduce the credit loss projections by such a large amount? I know the first quarter was exceptionally strong, but what gives you confidence over the next couple of quarters we'll see those losses at such a low number?

Yeah, I think we are being cautious, but I think from -- we've worked diligently and consistently over the last year to put in different practices that we think are having a material impact, and it's really showing when you look at the aging buckets, and what's going on with our overall portfolio and how it's performing. So we'd like to believe that those practices that we're putting in place and hopefully the little bit of uptick in the economy will all have positive impacts through the year.

And to get to 25 basis points for the year, that would presume something in the order of 28 basis points for the last three quarters. To get to 35, that's closer to 41 basis points. So if you look at the overall portfolio, we saw a lot of divergent behavior in Q1, and Mike talked about that within certain SIC codes, and we saw that also in behavior on the collection side where we actually saw a little bit of deterioration in January from December, and significant improvement through March.

So when we were looking at forecasting the year, we'd modeled out a bunch of different scenarios. The delinquencies, I said in my prepared remarks, reduced 50% from the fourth quarter of last year to the first quarter of this year. That helped get us to the 17 basis points. We've got that pickup based on the behavior in the agency -- in the aging. And when we put together our guidance assumptions through the rest of year, we presumed that the credit quality would stay pretty consistent with the average of Q1, but we wouldn't see a similar swing in improvement in other quarters.

That's very encouraging. Also Mike I remember back in fourth quarter of '07 I think you were one of the first few companies that actually talked about a slowdown in transaction growth rate. Are there any signs of improvement in any SIC codes that you see in your end markets that are showing any signs of improvement?

Well, I think the one we mentioned. We watch it closely. Things like public administration is one which I said in the call is probably pretty natural knowing the stimulus. We've seen a little bit of, at least as some have increased, some have either stayed neutral or got slightly better like the wholesale trade has got slightly better.

So I'd say most -- in the first quarter still were trending low in terms of still contracting, but there were a few bright spots, but not many.

Sorry, just last one. In those contracting, were the rates of decline relatively the same as you saw in several of previous quarters, or did you see any improvement in the rates of decline?

No, I think they're -- a few even probably escalated a little bit as well.

Okay, thank you so much.

Thank you, our next question is coming from Robert Dodd of Morgan Keegan.

Hi guys. Congratulations on the credit losses. I'm going to come back to that in second. Just the first question, on the account service revenues were up pretty substantially more than vehicle service. Have you taken any big -- any price increases or is there some other mechanic going on in Q1 in that line item?

Yeah, that's largely the addition of FAL; the international revenue that we're booking right now is going into account servicing revenue.

Okay, got it. And then just on collections, to come back. I mean, can you give us any color on a distinction between how your small customers are doing versus some of your larger customers? I mean, I'm trying to get a feel. Sometimes we see pick ups in collections in Q1 because of tax rebates, et cetera. Perhaps trying to get to any color there, maybe that's been a factor or not, given that maybe people have been getting bigger rebates because of their fourth quarter and their estimated tax payments were less. I mean, have you got any color on that kind of thing?

Yes, actually, we've segmented delinquencies based on geographic region, SIC code, and also by size.

Okay.

And there hasn't been a significant change between sizes. It's up across the board. It looks better if you're a small business, and it also looks better if you're a large business.

How about the -- one other one which is slightly -- bear with me. Has their improvement been more than you'd expect in kind of the SIC codes that had the worst fourth quarter, or has there been anything additionally counterintuitive like that?

Some of the areas from a SIC code perspective, I don't know if I'd say it's counterintuitive, but to give you a little bit more color, the delinquencies for heavy truck, for example, seemed to peak in November of last year and they've gotten better progressively.

If you look at -- most geographic regions are improving, including commercial construction. It starts to get a little bit more fragmented based on region, but commercial construction overall is performing better than it was.

The areas that we've seen further deterioration have been what we are calling in the new stages of construction, so things like poured concrete, site construction, masonry. They're smaller parts of our portfolio, but those are areas that we've seen erosion from a delinquency standpoint.

Okay, thank you, very helpful.

Thank you, our next question is coming from Tom McCrohan of Janney Montgomery Scott.

Hi everyone. Had a question on seasonality. Is Q1 typically a seasonally weak quarter in regards to payment processing transactions?

There are less business days in general, so we see a little bit less volume in Q1.

And as far as how it phases kind of rest of the year, is typically Q2 and Q3 kind of stronger from a seasonality point of view? Is it days in quarter? I don't know if it's weather related, but I'm just looking at the history here as far as kind of how transactions have trended. And it always seems like Q1 was weak, and the middle of the year Q2, Q3 usually looks a little better.

Yeah, that's true. And then Q4 gets impacted also by holidays, and it's a little bit more sensitive depending on when the holidays fall in the fourth quarter. But Q1 is most impacted, and we think particularly this year even more so depending because of when the holidays actually fell in the quarter.

Yeah, okay. That's helpful, and any comments on the competitive landscape? Are you seeing it softening somewhat? Are you gaining share from any of your competitors? Any commentary on that?

Well, I think as we said, we know that the GSA came from a competitor. We feel very comfortable that we're competing aggressively and winning market share. I would say that because of the economy, most of our competitors are more rational today in terms of what they're doing in the marketplace, and so we believe that helps us with the different services and the functionality that we can supply to our fleets.

So we feel very good that under these circumstances, we see good pipelines and we feel we're taking market share in the large end of the market, the midsize market. The low-end of the market is where we've been struggling, just because I think that's had the highest attrition either on involuntary or voluntary attrition, but still that's an open market to some extent.

Okay, given the comments regarding potential M&A down the road, how much leverage are you comfortable with as a management team in the event you did pursue a large M&A transaction, recognizing that today you're arguably operating with leverage levels below what your cash flow and balance sheet could support?

That's a tough question. It's going to depend a lot on the type of acquisition, the type of cash flow that that's also throwing off and the predictability of the cash flow stream from the acquisition target.

When we went public, we were at 3 times EBITDA, and we've managed pretty well in that environment, and didn't have an issue paying down our debt. But I guess you could make the underlying presumption we could probably handle something similar to that, but it's going to depend a lot on what the target is.

And I would say this -- if you're talking something of size because there could tuck-ins, there could be smaller ones that could help accelerate our growth, diversify our growth. But if you're talking larger ones, it's probably not something that's going to be imminent.

As we said, we're watching the market, we're making sure we understand what the opportunities are in the market, but I don't think that would be something that would be imminent for Wright Express at this point -- on a larger acquisition.

And also, the credit market availability is different now than it has been the last few years, so that would have to factor into the analysis as well.

Yeah, that all makes sense. If I could just quickly end with just a question or two on the credit side. You mentioned there was, I guess, a large client of MasterCard that went bankrupt. Could you just give us kind of the gross charge-off related to that?

It was about $300,000, a little over $300,000.

Okay, and is it possible to give us kind of the gross charge-off and gross recoveries for the quarter?

I just have the net --

Yes.

Numbers in front of me.

So was the net like 12, and that little 12.5 about?

No, the net -- well, the net excluding MasterCard is 10.7.

Okay. So from just looking at the Fleet business, the charge-off trends in Fleet sequentially they got a little better. Is that fair to say?

Yeah, the charge-off trends got better, but the aging, the amount of the people that rolled into delinquent categories got significantly better.

Yeah, yeah, definitely. I heard, that came loud and clear. So yeah, that's -- that was really--the upside's surprising. That's really quite a dramatic improvement.

And it just sounds like given the position you were in Q1 with what was going on in the business and you had that bankruptcy in Q4, and volumes kind of really declining substantially in the holidays period through January, it just sounds like you were understandably really conservative on -- when you provided initial guidance this year. Is that fair to say?

I think if you look at even the trends we were seeing through January on credit loss, were negative to December, so we saw some market improvement even between January and March.

Well great. Well, thanks very much for taking the questions.

Thank you. Our next question is coming from Bob Napoli of Piper Jaffray & Co.

Thank you, good morning. On the credit side, how much seasonality, and with the consumer side of the business, you see a significant amount of seasonality on credit with improvements in the first quarter. I would imagine that the small -- your small portfolio might see some of that, but I mean, historically have you seen delinquencies, and understanding you guys have done massive changes to improve credit, it went through very well, but is seasonality some of it?

Well, we do see, or have seen seasonality decline a little bit in the fourth quarter historically. We haven't seen the pick up. I'm answering a little bit off the cuff here, but I don't remember in a period before seeing the pick up that we experienced in the first quarter, and I'm looking back even compared to last year in the first quarter. It's -- our aging itself is looking still very strong.

Okay, and then if I look at your guidance, is it fair to say that you're expecting some from the first quarter trends further deterioration, if you will, on your transactions down 10% to 15%? Seems like you're looking for further deterioration on that front and some worsening of credit from the first quarter.

Well, let me answer the credit piece first. In the first quarter, part of the 17 basis points was a pick up where the aging improved. They were not presuming that you're going to get another pick up like that where the aging gets better.

Right.

We're presuming that it's relatively consistent with the overall credit quality in Q1 and deteriorating a little bit in the fourth quarter.

Okay.

Like we've seen in the past.

But on the transaction side, it's the existing customer base that we're focusing on where the contraction takes place, and we saw basically around 10% in the first quarter and we're pretty much modeling that throughout the year.

We're going to get the impact of increase of the Citi portfolio coming on. We have the impact of the full GSA this year. We'll have new business coming on in our attritions. Attrition rates we assume will remain low, but in the existing customer base we're keeping it pretty much at that 10% range.

And the range of 10% to 15% we're including in our guidance. If you look at the trend we've seen sequentially from Q4 to Q1, we've seen a higher level of erosion in that customer base. We had 4% negative volume from existing customers in Q4, and that went up to 10% in Q1, and in March it was higher than that average of 10%.

Okay. The FAL, the international business, is that progressing better than expected, or is that -- or are you a little bit behind plan? I know you talked -- you're very happy with it, but if you could give a little more color.

Yes, first of all, we've been consistent saying we're going after initially processing for international managed oil company portfolios. We are looking to host the FAL software in Europe, so I think that's a positive sign. We haven't finalized that yet, but that's hopefully something we'll be doing this year, and we feel good with the traction and the response we've had in the marketplace, but you really won't see anything material. There'll be a lot of development, a lot of work done, but it'll probably be 2011 and beyond before it becomes material to us.

Okay, and you talked a little bit more about transactions. What areas would -- in particular -- do you have interest? Are you interested in making additional -- tack on international acquisitions or within the US? What areas in particular would you like to beef up?

Yes, it's pretty consistent with what we've said. I mean, international would be one. What can we do to make what we're doing even more powerful? So that's something we'll continue to look at.

Are there contiguous markets that can just expand us with kind of our core, but in the different markets around us? And then, are there diversified and growth opportunities that we can look at different products to become more of an aggregator of data, more of a supplier of information services, or other services to our core Fleet business?

Is the pipeline of opportunities out there, have they increased and more actively engaged?

Well, I think what we've tried to do during this period knowing we were not going to pull triggers until we saw a little bit of better stability in the overall economy, is we've been lining up priorities, and if anything we've been narrowing. So we've done some homework, we've talked to people, and in those different categories, we're looking at anything from alliances to potential acquisitions, and lined up our priorities.

So I can't say there's more because I think we've said to ourselves, which ones would we want that would make sense for us in some of the categories I talked about.

Thank you, our next question is coming from Paul Bartolai of PB Investment Research.

Thanks, good morning everyone. First question just on the credit losses. I mean, with the benefit in 1Q looks like it was 9 or $10 million, and for the year it looks like it's about $20 million. Is that -- if you run through that -- run that through the model, I mean, it looks like that benefit is bigger than the increase in guidance. So I'm just wondering if there's some offsets that you're expecting from that. I don't know if it's maybe the slightly weaker transactions that you're seeing, but just wondering if you could reconcile that for us.

Yes, we changed the range of our guidance on credit loss about 20 basis points which would be closer to $0.25 of ANI EPS, and the largest offset was I talked about in the first quarter where we're performing better than our target on our bonus plan. So we're going to be ratcheting that up if we hit this level of credit performance. That's the largest thing. We're also looking at areas to reinvest in the business right now, increasing a little bit of our R&D and potentially our international investment.

Okay, and then if you look at the revenues from 1Q to 2Q, kind of the midpoint of the guidance which was about flat due to the higher gas prices. What's kind of offsetting that? Are you assuming kind of the finance fees are, you know, with the higher late fees, that that kind of ticks down given the -- what's happening with the credit portfolio, or are there some other options there?

Yeah, and what we're seeing is a change in customer behavior, so we are expecting to see the benefit we received on late fees to tail off in the second quarter.

Okay, great, thank you.

(Operator Instructions). Our next question is coming from Bob Napoli of Piper Jaffray & Co.

Thank you, just a couple other quickies. The credit line, when does that -- how long of a life do you have left on the credit line at that rate?

We have three years.

Three more years. And then the hybrid, 65% hybrid contracts right now, do you expect that to go much higher?

We have no plans. I mean, there's -- it's not like we have a strategy, but there's nothing that's saying that should increase in the future. But if we needed to and it made sense, we would consider it, but there's nothing imminent that's going to change that.

Okay, and let's see, your derivatives -- your hedging strategy, any update on, I mean, are you wanting to hedge I guess closer to the time period, or shorten the time period of the hedge. Can you give a little more color on the hedge strategy?

Yeah, we definitely will continue our hedge strategy. That's our plans. As we said, we'll look at it quarter-to-quarter knowing prices are low right now. We tried to give some flavor that even if we were to look at next year's prices, if you will, on the outward curve, it would be somewhere in the range of $2.16. I guess our view is that we feel we have time to wait and see if that will improve. If the economy improves and we just think we have the opportunity to still wait, but we'll look at it quarter-by-quarter and see what makes sense.

Great, thank you.

Thank you, your next question is coming from Tom McCrohan of Janney Montgomery Scott.

Melissa, hi. Just a quick follow-up on the aging, given that you saw marked improvement there, and that was primarily the driver behind the guidance going up, and the credit loss assumptions going down. Can you give us any metric -- I don't know how you age your accounts. I don't know if you do it by number of accounts, or dollar amounts, probably by dollars, of say just like 30 days past due, how the dollar amounts 30 days past due, how they kind of migrated during the quarter, or any other specific metric you looked that kind of supports your comments around the marked improvement.

Yes, actually the aging itself was about 98%, a little over 98% current. Some of the benefit that we received from Q4 to Q1 is because we had higher fuel prices in some of the older aging buckets and that was something we knew would happen. So if you look at the amounts that are delinquent, I said that it reduced by $11 million or about 50%. If you index out fuel prices and just look at it on a gallons basis, all the items that were delinquent dropped 30% from Q4 to Q1.

Wow! That's pretty significant. Now, when you say 98% current, 98% of dollars, of number of accounts?

Dollars.

Dollars, thanks.

Thank you, there are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Well, thank you Jackie. Thank you everyone for listening, and we'll look forward to talking to you again next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.