WEX Inc (WEX) 2009 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Wright Express Corporation third-quarter 2009 conference call. There will be an opportunity for questions after the prepared remarks. (Operator Instructions) Today's call is being recorded.

At this time for opening remarks and introductions I would 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 submitted to the SEC.

We will be discussing a non-GAAP metric, specifically adjusted net income, during our call. Adjusted net income excludes non-cash mark-to-market adjustments on our fuel price-related derivative instruments and the amortization of acquired intangible assets as well as the related tax impacts.

Full-year adjusted net income results include those items as well as at asset impairment charges, adjustments related to the deferred tax asset and related tax receivable agreement, and of the gain we recorded on the settlement of a portion of the amounts due under our tax receivable agreement which we prepaid in Q2. Please see exhibit one included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income for the current quarter.

I would 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 will turn the call over to our CEO, Mike Dubyak.

Hello, everyone, and thanks for joining us. This was another good quarter for Wright Express reinforcing recent trends. We continued to deliver strong earnings in a tough environment exceeding the top end of both revenue and earnings guidance.

Revenue for the third quarter of 2009 was $86.6 million, nearly $4 million above the high end of our guidance range. Adjusted net income was $0.63 per share exceeding the top end of our guidance by $0.04.

The trends in the business this quarter were similar to Q2. We continued to control expenses, including bad debt, our existing fleet customer base or same-store sales remained stable sequentially, and fuel transaction volume in our fleet business was almost exactly what we expected for the quarter. Looking forward we believe we are well-positioned to benefit as the economy continues to recover.

Here is a quick breakdown of the $0.04 upside we experienced this quarter. About $0.02 related to payment processing revenue, primarily a continuation of better-than-expected results in MasterCard, with some upside from higher fuel prices than assumed in our guidance.

The other $0.02 was attributable to late fees. After tightening our credit policies and changing the calculation of late fees we expected more of our customers to respond by paying us on time. This response didn't occur to the extent we thought it would, so revenue from late fees exceeded our plan.

On the expense side credit losses were slightly higher than we anticipated but well within our historical range. The additional expense and credit loss was offset by savings in other areas. Our Q3 guidance assumed we would not see a significant improvement in business volume. As I mentioned, fueling activity in the quarter was in line with our forecast.

Starting in Q3 last year and continuing through the fourth quarter we had a significant drop-off in existing customer usage and we have remained at roughly that level through the first nine months of 2009. If you look at our organic transaction volume on a same-store sales basis, we still seem to be managing along the bottom; down 9% in Q3 from year earlier levels. This is slightly better than the 10% decline we reported last quarter, but we believe the improvement is primarily due to an easier comparison rather than true increased usage.

We continue to see divergence in customer behavior across different industries similar to what we saw last quarter. On a year-over-year basis public administration is the only SIC code where there was improvement in same-store sales which would exclude the GSA. Declines in most other industries were generally in the range of 5% to 10%.

In terms of geography, the Southeast and Southwest are showing declines of 11% to 12% while the Northeast is the strongest region with a decline of only 5%. The weakness in the annuity side of our business was offset by solid performance at the front end. Our sales pipelines are strong.

We have looked at the recession as an opportunity to build awareness of our value proposition at a time when better management controls and savings on fuel are more meaningful to the market than ever before. Instead of pulling back we have continued to invest in our business, stepped up our sales efforts, and protected the services our customers value most.

Overall, the new vehicles we have added this year have more than offset the contraction in our installed base. Including the GSA and the news Citi portfolio added in the second quarter, our total average vehicle count for Q3 was by approximately 3% from a year ago.

Breaking this down in detail, the average number of vehicles in our large- and mid-sized fleet portfolio was up 6% in the third quarter from the same period a year ago. This largely reflects the addition of the GSA Fleet portfolio we added in December of 2008. We recently won new state government business that will add approximately 13,000 vehicles starting in early January.

While the economy has had the most impact -- where the economy has had the most impact is in the small fleet market and our average vehicle count in small fleets was down 1% from the third quarter last year. This reflects the contraction we are seeing in the existing customer base and to a lesser degree slightly higher attrition rates than last year.

Although the economist say that overall GDP is improving, our small business prospects are telling us it still feels like a recession to them and they are still being cautious in making buying decisions. This was reflected in our Wright Express direct channel where the average small fleet vehicle count was down 2% in Q3 last year.

In our heavy truck private carrier fleet vehicle count remains weak reflecting ongoing conditions in the transportation sector. The number of vehicles in heavy truck was down 7% from the comparable quarter of 2008. The decline is mostly as a result of higher attrition due to credit tightening and contraction in the existing customer base.

As we work to maximize growth in our core business, we are continuing to invest in our diversified businesses as a way to create both opportunities for Wright Express and greater value for our customers. The first of these investments was MasterCard where third-quarter purchase volume grew 31% from Q3 last year to $876 million. Our MasterCard segment has outperformed every other part of our business during the recession.

Our online travel customers volume has remained surprisingly strong driving usage of our single-use account product. We are beginning a test program in Q4 with another large online travel company and hope to have this program fully ramped up by the end of next year. This is an exciting win that has the potential to be a large customer for us.

Our newest diversification initiative is to expand our business internationally. Our target market is comprised of major oil companies that have large fleet car portfolios. At this early stage we are focused on a more limited approach than the full-service processing model we offer to oil companies in the US and Canada.

Our near-term objective is to establish private label processing relationships with the oil companies where we will function as an application service provider handling the point of sale authorizations and processing the transactions. Given the large size of these oil company portfolios, we believe there are significant opportunities for growth and we are beginning to invest more aggressively in this area. It will be several years before this becomes materially accretive due to the ramp up period on the development needed to support the business.

Led by MasterCard and international our diversification efforts are performing well. In aggregate these businesses are growing and contributed $17.2 million to our top line in the third quarter, up 38% from $12.5 million in Q3 of '08. This represents 20% of total revenue in the quarter, up from 11% in Q3 last year.

Our strategy for managing through the economic downturn is focused not only on the top line, but also on tightly controlling operating expenses while still investing wisely in our business. In addition one of our objectives was to control bad debt without increasing voluntary attrition over our goal of 3%. Overall our attrition rates remain low. Voluntary attrition for the third quarter was 2% compared with 1.9% for Q3 of 2008.

Fleet credit loss for the third quarter came in at 19 basis points compared with 8 basis points in Q2. In comparison with many of the other companies that provide credit in US markets we are continuing to deliver strong performance in the collections area with low loss levels. Melissa will cover this in detail when she walks you through operating expenses in a few minutes.

In any economic environment it's an advantage to have healthy liquidity and cash flow, and Wright Express has both. We are working to deploy our cash both strategically and conservatively. In Q3 we used our cash to pay down roughly half of the $55 million we borrowed last quarter, primarily to fund the Realogy prepayment, while also buying back around $4.3 million of our stock.

As a result, we concluded the third quarter with a relatively low level of financing debt and a leverage ratio of 1.2 times EBITDA compared with 1.4 times EBITDA at the start of Q3. Going into Q4 this positions us to pursue all available options for generating the highest possible return on our cash flow, including paying down more of our financing debt, buying back stock, and exploring alliances, mergers, and acquisitions that advance this objective.

In conclusion, Wright Express performed well this quarter. Once again we continued to focus on growth and managed our business effectively despite economic conditions that were less than ideal. We continue to invest in opportunities to diversify our revenues and add value for customers. We extended our hedging program to insulate our future results from fuel price volatility. We kept a tight rein on credit loss and maximized the benefits of our strong cash flow.

Although the macro economy may be showing signs of modest improvement, the current trends in fleet fueling activity suggests the recovery hasn't yet extended to a good many of our existing customers. When it does and we begin seeing volume in our installed base beginning to grow again, the upside for our business is likely to be substantial. In the meantime, we will remain focused on attacking the market, further strengthening our business, and continuing to deliver the best possible performance for our shareholders.

I will now turn the call over to our CFO, Melissa Smith, so she can review our financial results and then we will take your questions.

Good morning, everyone. I will review our financial results for the third quarter and conclude our prepared remarks with the Company's guidance for Q4 and full year 2009. I would like to begin with some background.

One of the points we have been made in explaining our business model is that all things being equal over time our cash flow will be roughly equivalent to our adjusted net income. More recently with the prepayment in the Realogy portion of the tax receivable in agreement, cash flow should be several million dollars more than A&I. In the real world, of course, things are rarely equal most often due to fluctuations in fuel prices, so it's usually difficult to make this connection.

In the third quarter of 2009, however, fuel prices were essentially the same as in Q2 so we experienced something very close to normalized cash flow generation. Our A&I for the third quarter was $25 million and as expected we realized an additional $3 million in cash from the Realogy prepayment. The resulting total of $28 million is roughly the amount we paid down on our financing debt and spent on buying back stock in the quarter. This shows the significant cash flow we generate in the normal course of our business.

As Mike mentioned, several factors contributed to the positive results this quarter. On the revenue side we benefited from higher than expected MasterCard purchase volumes, fuel prices, and late fee income. At the same time we have continued to be successful in managing credit loss and other operating expenses. We did see a return to more normal levels of credit loss expense and a delinquency rates in the receivables portfolio compared to historically low levels in Q2.

Credit losses for the quarter were slightly higher than our expectations. New business, again, helped offset the year-over-year contraction in our existing customer base. Over the long term we believe the consistent net growth we have achieved in our total vehicle count sets the stage for a solid rebound in transaction volume as a recovery spreads across the economy. In the meantime we have been able to control costs, effectively manage our loss rates, and continue to generate solid free cash flow.

With that as background I will discuss our financial metrics in detail. For the third quarter of 2009 total revenues decreased 20% to $86.6 million from $108.5 million for the third quarter of 2008. This compares to our guidance range of $78 million to $83 million. Net income to common shareholders on a GAAP basis was $23.4 million or $0.60 per diluted share compared with $72.3 million or $1.82 per diluted share in Q3 last year.

As I mentioned, the Company's non-GAAP adjusted net income for the third quarter of 2009 was $24.9 million or $0.63 per diluted share. This compares with $21.8 million or $0.55 per share last year.

Comparing Q3 this year to the same period last year revenue for the Fleet segment declined by 25% to $75.7 million from $101 million last year. The average number of vehicles serviced was approximately $4.6 million compared with $4.5 million a year earlier. Total transactions declined 7% to $67.1 million from $72.5 million last year. Transaction processing transactions declined 17% to $14.1 million and payment processing transactions declined 4% to $53 million for the quarter.

Reflecting the lower price of fuel compared to last year as well as contraction in fueling volume within our installed base of customers, payment processing revenue in our Fleet segment declined 35% to $50.2 million from $76.8 million in Q3 last year. When we provided guidance last quarter we expected a 7% to 10% decline in same-store sales over the second half of the year and our results in Q3 2009 reflected a 9% incline.

The average expenditure per payment processing transaction was down 35% from the third quarter last year to $52.50 due to the drop in average fuel prices to $2.58 per gallon. Our net payment processing rate for Q3 2009 increased nine basis points year-on-year to 1.8%. Although we are continuing to see positive results from our shift towards hybrid pricing arrangements, compared to the second quarter of 2009 our net payment processing rate was down five basis points due primarily to the $0.25 increase in fuel prices sequentially.

Consistent with Q2 approximately 60% of our transactions in the third quarter were at merchants with hybrid contracts. Rebates as a percentage of fueling dollars paid to larger fleets and leasing companies were up slightly compared to the second quarter of this year.

As Mike discussed, our MasterCard segment is continuing to grow driven by strong demand for our single-use account product. Total revenue contributed by MasterCard in the third quarter grew 46% to $10.9 million from $7.5 million in Q3 last year. Total MasterCard purchase volume was up 31% to $876 million from $670 million in Q3 last year. This was the largest driver of the increase in revenue for the quarter.

The net interchange rate for Q3 was 1.1%, which is up seven basis points for the third quarter last year. This increase contributed approximately $850,000 of the revenue growth in MasterCard. The remainder of the revenue growth is due primarily to an increase in cross-border transaction fees.

Turning now to operating expenses, on a GAAP basis the total for Q3 declined 7% to $50.3 million from $54.1 million in the third quarter last year. We have continued to aggressively manage expenses and overall they were in line with our expectations. The decrease compared to Q3 last year was mainly due to lower credit loss and operating interest expense. These declines were partially offset by increases in salary and service fees.

I will take a moment to focus on credit loss. Overall credit losses returned to more normal levels in Q3. On a total basis, including both Fleet and MasterCard, credit loss was down $3.7 million or 39% from Q3 last year to $5.7 million. Total charge-offs in the quarter were $4.4 million and recoveries were $2.7 million. Charge-offs continued to be made up primarily of small businesses with balances less than $25,000.

We did experience one significant bankruptcy in the MasterCard segment, but none in the fleet segment. Recoveries were down in terms of dollars collected compared to the second quarter, which was a significant factor in the sequential increase in credit loss expense. We expect this decline in gross dollars recovered as we are now collecting on balances from transactions made after fuel prices dropped below $4 per gallon.

As of September 30 balances due 30 days -- balances past due 30 days or more represent 1.4% of the portfolio or about $10 million. To put this into perspective, this is one of the best months we have ever seen and is better than historical averages. However, it is a deterioration compared to our Q2 results.

All of these factors contributed to our loss rate in the Fleet segment coming in at 90 basis points of spend as we expected, closer to the midpoint of our historical loss range than in the second quarter. The 19 basis points in Q3 compares with 20 basis points for the same period last year.

Let's now move on from credit loss to other key expense lines. Salary and other personnel costs for Q3 2009 were $18.7 million, up $4.1 million from last year. This increase was due primarily to the bonus plan. Last year we reversed approximately $2.5 million of bonus expense because we did not expect to meet the performance goals of the plan. This year we have reported an expense of approximately $2 million for our 2009 bonus plan.

Our average headcount for Q3 was 708, which is down 25 people from Q3 last year. The overall reduction in headcount reflects our continued focus on cost control.

Continuing with operating expenses for the third quarter, service fees were up 48% from Q3 last year. The majority of this increase is due to the growth in the MasterCard purchase volume and to a lesser extent increases in cross-border purchases. As in Q2 operating and interest expense was a positive factor in Q3 declining by $6.8 million or 71% from the third quarter last year to $2.8 million.

Our average operating debt level, including CDs and Fed funds, was $478 million compared with $756 million in Q3 last year. This decreases in line with the change in fuel prices. The interest rate on our CDs and Fed fund borrowings for Q3 was 1.6% which compares with 2.6% in Q2. Our interest rates have been declining for the past several quarters and although we expect to continue to benefit from low interest rates through the end of the year, we do not expect to see rates drop significantly lower as virtually all of our higher-rate CDs have matured.

The remaining operating expenses were flat when compared to last year.

Our effective tax rate on a GAAP basis was 39.6% for the third quarter compared with 33.2% for Q3 a year ago. Our adjusted net income tax rate this quarter was 37.8% compared with 19.9% for Q3 2008. The tax rate last year included adjustments to our deferred tax assets that made the rate unusually low.

Turning to our derivatives program. During the third quarter of 2009 we recognized a realized cash gain of $3.8 million before taxes on these instruments in an unrealized loss of $100,000. We concluded the quarter with a derivative asset of $20 million. Our weighted average prices locked in for Q4 are between $3.02 and $3.08. We have completed nearly all of our purchases for 2010 and the price range is $3.07 to $3.13. Assuming prices remain at current levels this range would come down slightly when we complete purchases for the year.

We have received $15.4 million of realized gains for our hedging counterparties so far in 2009. Expect that hedging will continue to be important to our business model going forward and we still intend to purchase derivatives in the future.

Moving on to the balance sheet. We have nearly 2.5 years left on a revolving credit facility with pricing significantly better than current market rates. We entered into a new interest rate swap last quarter that fixes LIBOR at a rate of 1.35% for the next two years on $50 million of our financing debt. We ended the quarter with a balance of $166 million. For the year we have reduced financing debt by $5 million after using $6 million in cash for share repurchases and $51 million for the prepayment of the Realogy portion of the tax receivable agreement.

Wrapping up the review of our financial results, capital expenditures were $4.2 million for the third quarter. This reflected continued reinvestment in our core product offerings and strategic diversification. For 2009 total CapEx is expected to be between $16 million and $18 million.

I will conclude with some key assumptions and our updated financial guidance for the fourth-quarter and full-year 2009. Although we are planning on continued success in finding new customers, our Q4 guidance assumes a year-on-year decline in transaction volume within our existing customer base of approximately 5% to 7% due to economic conditions. We also expect a normal seasonal decline in fleet transaction volume and MasterCard spend volume in Q4 based on fewer business days and a slowdown around the holidays.

At the same time Q4 has historically been a difficult quarter for credit losses and we are expecting our credit loss for the quarter to be in the range of 25 to 30 basis points. Let me remind you that our forecast for the fourth quarter and full-year 2009 are valid only as of today and are made on a non-GAAP basis as Steve discussed earlier.

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

For the fourth quarter of 2009 we expect to report revenues in the range of $76.5 million to $81.5 million. This is based on an average retail sale price of $2.53 per gallon. For the full year 2009 we expect revenues ranging from $311 million to $316 million based on an average retail fuel price of $2.36 per gallon.

In terms of earnings, for Q4 2009 we expect to report adjusted net income in the range of $20 million to $22 million or $0.50 to $0.55 per diluted share. We expect adjusted net income for the full year 2009 in the range of $83 million to $85 million, a $2.12 to $2.17 per diluted share on approximately 39 million shares outstanding.

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

(Operator Instructions) Reggie Smith, JPMorgan.

Nice quarter.

Thank you.

I guess my first question, you guys talked about Canada this morning. I was wondering if you could kind of give a little more detail there, maybe explain what the market looks like today. Like who is providing those types of services and maybe kind of size what the market is relative to the US?

And just to be clear, it sounds like you would have a transaction processing type relationship up there or would it be a funding payment processing type relationship?

Yes, Reggie, let me clarify. In Canada we do process private label programs as well as we have our Wright Express card at some locations up there, and that is processed out of our location here in South Portland. But when we talk international, so beyond North America, we are really talking about the acquisition we made of the FAL company in New Zealand.

We are hosting that in Vienna. And we will do international transaction processing of out of that site for major oil companies in probably different parts of the world, primarily the European market, Asia Pacific markets, but it could extend beyond that.

What I was alluding to was that to get started, since this is brand new for us, we are going to start primarily as a processor where we basically will do authorizations, we will do transaction processing, and then we will feed the transactions back to the oils and feed back into their AR systems and into their CRM systems. So they would do, if you will, the credit collections customer service.

Over time we hope that we can migrate and move in to those operations services. But initially we would just be a transaction processor for these major oil companies in different parts of the world. So I hope that clarifies the Canada versus the rest of the international.

No, it definitely does. I guess can you talk a little bit about who is providing these services today? Would it be competitive type wins, are banks doing this now? And maybe how your product offering kind of compares to those guys or how it matches up?

Yes, it does vary but in most cases it is managed today by the oil companies. So they have their own multiple call centers, if you will, if it's in the European market in various places or if it's in other parts of Asia Pacific. So they are primarily managing it in-house today. That may change over time, but that is how they are doing it today.

Okay. If I could sneak one more in. Just kind of looking at the gallons per transaction, it's up this year and I know it's kind of early to talk about '10, but I guess what is your kind of longer-term view there? Should that also -- should it continue to increase over the coming years or is there anything going on in your business mix that might cause that to decline a little bit over time?

I think what you have seen was in the existing customer base. The customer base has contracted the number of vehicles. The ones that are remaining are a little bit more active so you are seeing more transactions. As far as how that looks in the future I don't know. I could say coming in to the recession you saw at first just a slowdown in transaction volume and then ultimately people starting to shed the number of vehicles they had. (multiple speakers)

I guess I was actually talking about gallons per transactions. So I guess I am trying to get at are your -- is your average vehicle getting larger or smaller or --?

Yes, some of that has to do with when fuel prices were higher -- when you are comparing it to some of the high points last year, people tend to buy the same amount of fuel but they will do it in lower transactions. So the average size of the transaction is a little bit smaller.

Because they were filling up more often as the price of gas was going up. Now that there is some stability in the price of gas they are probably just waiting until they have to to fill up, so the overall average transaction has gone up slightly. But we really haven't changed the mix of vehicles that we service; it's just some of those trends I think are impacting it.

Okay. I will hop back in the queue. Thank you.

Bob Napoli, Piper Jaffray.

Thank you, good morning. Question, I guess first of all on same stores sales, given the trend I mean -- I guess the dreaded stabilization word. I guess it's a lot better than plummeting; stabilization and then hopefully accelerating as we will hear out of you in a couple of quarters. But at this stabilization rate do you expect same stores sales to be positive in the first quarter of 2010? Mathematically would that be the answer or not?

I would say at this point all we have seen is sequentially kind of a stabilization. We haven't seen same-store sales sequentially go down, so that is at least saying it has maybe bottomed. We have no indications though, because even if we look at the SIC codes and some of the geographic information it has bounced around a little bit. But overall we haven't seen anything that says in particular it's ready to bounce back.

The only areas -- we do try to segment small fleets and large fleets. The small fleets are coming back a little bit better than the larger fleets probably because they went down first and went down pretty dramatically. The larger fleets seem like they are lagging, but they also started to come down later so maybe that is just a natural progression of the small fleets bouncing back a little bit more. But when you average them together we are still saying that it's just flat sequentially quarter-over-quarter.

Okay. New business, can you quantify how much new business you have added this year compared to other years and what the pipeline looks like?

I would say that we feel it's probably in line with what we have seen in past years in terms of new business growth. The pipelines though I think are strong. We are seeing in the second half of this year, as I say in the prepared remarks, we have been trying to be aggressive in attacking the market. So we have been incenting our sales force in different ways, doing some different things with some of our partners to try to leverage ourselves into different parts of the market more aggressively.

The pipelines are very full, both on MasterCard and our Fleet program. Just even the fact we won a state piece of business for 13,000 vehicles we feel very good about our ability to continue to win marketshare and what we see in the pipeline is encouraging.

On MasterCard it's pretty impressive performance out of MasterCard. You said you have another major online travel customer coming in. I guess how much of that is international. Could you maybe give a little more color on that? Is all the growth coming from the online or are you getting growth in the insurance market and the corporate card market as well?

Yes, there is no doubt that the biggest part of our growth is from our single-use product. And that is the insurance businesses that we brought on, but a lot of it's in the travel business as well. There is no doubt that consumers are using that probably more today to save money and book their own travel, and we are getting the benefit of that with our different customers.

There is some international. It's still a smaller percentage; most of it is still domestic. But it is a piece that some of our online partners, if you will, acquired some businesses last year in the international markets and that gave us a little bit of a bump even kind of year-over-year with some of those acquisitions.

I hope that helps.

Yes. This type of growth it sounds like with the momentum you have you will see -- you don't expect the growth rate to slow down into 2010?

Well, I think that we see that on the insurance and the warranty side we think there is abilities for that to continue to grow nicely. We just talked about this new piece of business. There is no guarantee, but we are starting with them this year and we, hopefully, will continue to win their confidence and roll that out all through next year. And that can be very large so that will add to our growth on the MasterCard as I have kind of mentioned in the remarks as well.

Okay. And then on the international, you sound pretty confident in signing up several of these big oils. Am I reading that wrong? What is the timing? I understand it's going to take a while to scale up and have it be meaningful to earnings, but are you getting close to having some announcement on signing some cornerstone customers?

Yes, I would think there would be some announcements forthcoming. I don't want to say exactly when, but I think we are getting closer to the ability to say that would be forthcoming. Hopefully, if not by the end of the year, then by the early part of next year because we are saying we are gearing that up. We are being more aggressive on our development, and we feel very good what our position is today and how we are trending.

Some of the new opportunities are accelerating beyond what we even thought as we entered this market. We probably won't see actual processing revenue from some of the new customers until at the earliest next year, but we will still be developing for others. So we won't see true meaningful accretion probably into 2011 and 2012.

Great, that is exciting. Last question on just stock repurchases. With your strong balance sheet and your stock actually down this morning, but with the valuation out there and with the balance sheet that you have and the cash flow that you have why not get a bit more aggressive? Or is it because -- are you seeing deals, are you seeing strategic opportunities that are taking priority?

I think we have been fair saying we will look at all three -- paying down our debt, stock repurchases, and acquisitions. I think we still buy us a little bit on the liquidity side, both because we would like to see this economy get stronger, first of all, and I would say second of all because we do see potential opportunities in alliances and acquisitions. We would want to make sure we are well-poised for that, but I think we are just being cautious and biasing on the liquidity side at this stage.

But we will still look at all three of those areas as ways to deploy our cash effectively and hopefully get the returns we want for our shareholders.

Thank you.

Tom McCrohan, Janney Montgomery Scott.

Good morning. Most of the questions I had have been asked. I will just have a couple quick follow-ups on the MasterCard results which were incredibly strong. What is not intuitive is -- I always viewed that product as more of a travel product, and given what is going on in the economy I am just so surprised at how -- what the outperformance has been $100 million sequential in volumes this quarter. Could you break out for us what portion of the volume is attributable to that one online travel customer?

I think we have said in the past that the revenue is about a 50-50 split between our single-use account product and the rest of our products. So there is a pretty good balance within the portfolio. When we have seen growth in the single-use product this quarter it has been in part because the businesses that we have as customers have expanded. I know Mike talked about geographic expansion.

So not only have they grown domestically with the programs that we have in place, but I think we have picked up some revenue just because they have gone and rolled out the program into other areas of their business. So it's a combination of a bunch of things that have helped us in the quarter.

Okay. So 50% is single-use and then it's a portion of that 50% that is in online travel?

Correct.

Okay. And on the bad debt side you talked about changing the policies around bad debt. Can you give any more specificity around that, like what exactly you changed and what the policies are now for customers that are paying late?

Yes, the things that we have done -- and this has been kind of over the last, I would say, 18 months -- has been changing the period in which we will shut someone down. So we will more rapidly turn somebody off if they have a poor collections score based on their past behavior patterns instead of treating everyone kind of the same. So we have gotten a little bit more sophisticated in our approach to collections and I think that that has paid dividends.

I think you might be also asking just about the late fee, the way that we assess late fees. We just changed the method of calculation so it was more consistent with people in the industry, and we eliminated the grace period. We had just given people in grace period; it wasn't part of the terms and conditions.

So that policy change contributed to better-than-expected revenues from bad debt expense for the quarter. But if you look at kind of AR days it looks like your collection days went down, so I am just trying to -- it seems like the policy is working. But on the other hand, it's not? I mean, I am a little confused on how to reconcile the AR days kind of shortening up with what you are saying.

Yes. No, actually I think that that is a good question. The AR days for us don't change all that much. DSOs are pretty consistent. Where you see the upside on late fees are people that tend to pay, let's say, in 35 days. So they are still making a payment, they are just doing it slightly delayed beyond the due date and so that behavior didn't really change from what we have seen in the past.

What we had anticipated is because the late fee was higher that the customer would be more likely to pay us within the 30-day period of time and alter their payment experience and that hasn't really happened. So we got benefits from that on the revenue side. At the same time, from a collections perspective, the collection methods that we are using seem to be working to make sure that we are getting payment from the higher risk accounts that may have charged-off historically.

Okay. And then how that segues into your fourth-quarter credit loss guidance being higher than what you saw this quarter, you are not viewing the bad debt expense this quarter being higher than your expectation as a leading indicator of higher credit losses. Your guidance more reflects seasonality in the fourth quarter, is that how we should be interpreting that?

Yes, that is correct. We have historically seen a slight erosion in the aging in the fourth quarter and so we are expecting to see something similar happen in the fourth quarter of this year. We were pretty close to what we expected in Q3; it was often little bit, but it was pretty close. So we are not seeing any [wholesale] changes in the portfolio that have us concerned.

Just I have one correction. We said that charge-offs in the quarter were $4.4 million, but recoveries were $1.7 million.

Okay. Thanks.

Tim Willi, Wells Fargo.

Thanks and good morning. A question on the balance sheet and then on the macroeconomics. First was regarding the balance sheet and funding. Given where rates currently are, I know there might be a little bit of maybe near-term earnings give up.

But for longer-term visibility around working capital and under an assumption of increasing payment volumes over time, how do you think about trying to put in some longer-term, lower-cost funding around the payment processing business to maybe give you a bit more visibility as opposed to sort of the current strategy?

From just an efficiency standpoint as well as from a cost standpoint, the funding that we use through our bank, the brokerage CDs, they are very effective in dealing with significant fluctuations in the funding source from each period. So if you think you can have a pretty dramatic change within a month of what the amount of your debt requirements are. So we like the brokered CDs and our ability to kind of fund out through our Fed fund line when needed, because all-in that creates an efficiency in the rate.

What we have done is try to extend the period of the CDs and take advantage of the current rates but being mindful that we can only extend it so far because we have to match the asset, the timeline of the asset to a certain extent. So we think that we are trying to balance both of those things. If you look at our financing debt, we locked $50 million of our financing debt last quarter to try to take advantage of the lower rates.

Okay. If you said it earlier, I missed it and I apologize. But what kind of duration are you on right now with CDs? How much has it lengthened up and where could you take it if you still have some flexibility there?

It's about seven months right now is the duration on average roughly. I think the longest we have gone has been close to a year, so you are talking about a matter of months. At some point, from a regulatory perspective, you are not matching the turn of the asset.

Okay. Is there a favorable -- I guess I wouldn't say reinvestment rate, but in terms of what you are currently paying versus what new fundings coming on in, is there any kind of notable or noteworthy difference in rate right now?

No, we think that the rates have pretty much adjusted through the CD portfolio.

Okay, so there is really no arbitrage there. And second thing was just around your comments around your customer base and the smaller businesses, etc. Do you think -- is this purely still an economic demand issue, in your opinion, around the growth of your customers or is it somewhat tied again to what we continue to see and hear about the banking industry and lack of capital and credit?

I know they are intertwined, but it seems that we hear more and more about there are people that want to borrow money but the banks just haven't really loosened up the purse strings enough. Clearly that would impact expansion plans or growth plans for your current customers. Just sort of curious what feedback you get from sales and customers around those two issues?

I would say that the customer base we have it's not so much that they need capital to expand. I mean, they are basically going to deliver services and goods based on what is going on in the economy with people's buying patterns. So I think what they are doing today is just cutting back expenses to manage against their cash flows, and they are not seeing any real pickup.

As we said in the remarks, the small businesses still feel like this is a recession because they are not seeing that pickup. So I think the cutback has been they just found that their business was down. They cut back on number of transactions, then they cut back on number of vehicles. We are kind of waiting to see that turn around once the economy gets more robust and their services start to pick up, whatever industry they might be in.

Okay. And then lastly, just one more. On pricing I think in the last quarter or two you had mentioned a more rational pricing environment as some competitors that are overlevered or at least more levered than you have to get a bit more religion about margin and cash flow. Does that remain the case?

I would say we look at it from both sides. One is from the Fleet side and I would say that we still have aggressive competitors in the marketplace, but I think that everybody in this marketplace is looking for profitable business so I think it makes everybody more rational. But they are still in the marketplace very competitively. There are some of our competitors, though, that have actually exited or pulled back from certain markets. I think that is an advantage for us.

On the merchant side with our hybrids that has relieved any pressure that we were seeing last year at this time because of high fuel prices. The hybrids have, I think, worked for both parties. Even if prices start to spike back up, we don't expect the same pressure we saw last year because the hybrids kind of offset that pressure because of what it does. As the price goes up that transaction fee becomes a lower percentage of the overall, if you will, interchange we charged the oils.

Okay, great. Thanks.

Robert Dodd, Morgan Keegan.

Just two. One on the sales channel and the other one on credit, to go with credit and the impact on the customers. I know you are very focused on attrition and you have done a good job controlling that. Are you seeing -- I mean I have to wonder with a limited availability of alternatives right now for some of these customers, particularly the ones paying the incremental late fees, there may be a little bit of pent-up attrition so to speak with irritation that you are raising fees on them at this point, whereas at this point they don't have anywhere to go.

Are you seeing an increase in complaints coming in to your call centers about these fees or is it just people just paying it, basically ignoring it, and moving on?

It's interesting as we look at -- first of all, our attrition rates we even said for the quarter were pretty much in line with last year, so the 2% versus 1.9%. But we do monitor that because as we made some of these changes we wanted to first say to ourselves we are not going to let our attrition get out of hand. We felt there would be some trade off, letting it maybe get higher than normal if we had to because bad debt can be such a big part of our cost drivers.

But as we look at the reasons why people normally leave on a voluntary basis we are not really seeing that pop up as something that has accelerated or has increased our attrition rates. And it's a very small percentage of fleets saying they are leaving because of that.

Okay, thank you. And then the second one, on the last call you mentioned maybe being a little bit more aggressive in trying some different approaches in how you market to the small fleet segment. Can you give us an update on any pilot programs or anything you have done in that regard to pick up growth absent, obviously, economic rebound?

Yes. I won't speak to the results. I think we talked about last time we were doing some tests on outbound telemarketing to the small end where before we mostly did lead generation with mailers. We would get responses and then we would follow up; now we were trying to reach out. So we are still in that test phase so there is not much to say.

We have gotten more aggressive with the small businesses, even working closer with our oil companies. We have some affinity programs and private label programs that we have used to help leverage more into that small fleet market, and we have seen some uptick in trends from that as well. So we continue to work that aggressively. We hope as the small businesses recover then we will even see more impacts from some of the things that we are doing.

Okay, thank you.

Greg Smith, Duncan Williams.

You mentioned this deal with another online travel company for the rotating account. Is that deal -- is that signed and it's just sort of in the testing phase ahead of full implementation?

It is signed. We are rolling out a piece of their business this year and everything is going well, but all I wanted to reiterate was that to really win all of their business will take time. But we are in a position where we have now the ability to continue to prove the strength and viability of our product and then, hopefully, win more of their business throughout next year.

Mike, can you remind us of the economics of that? I assume you are getting the interchange and then sharing some portion of that with the client?

Yes, exactly. It's almost like when we look at our co-brand business, how much do we have to do on the servicing side. There is a little bit less on the servicing side so we will share some of that back because they are maybe doing more of the servicing. So we just look at the total, who is driving some of the different expense areas and then how much we are willing to share back.

Okay, great. That is all I have. Thank you.

[Paul Birdali], [PB Investments].

Good morning, guys. Just a couple here left. First to follow up on the late fees, I just want to make sure I am clear here. It sounds like you are still not seeing any different experience in the collection. It's just people are deciding to pay the late fee regardless and they are still paying the balances off?

Yes, that is right. Those are people that would have paid anyway. They just were going a little bit delinquent pasts due their balance and were a late fee historically. We had thought with a change in the calculation that we would see an alteration in that payment pattern. It hasn't really changed.

Okay. But there is no concern about changing credit quality given they are paying higher late fees?

No, no. If you look at the amount that we have past due compared to other years, it looks very solid.

Okay. And then on the guidance on the same client transaction, I think you said 5% to 7% in 4Q. It sounds like that is just simply a function of the math and company easier. You are not really seeing or assuming any improvement in the base business?

That is generally right, yes. As Mike said before, it's like we are kind of lingering around the bottom. We are not seeing further degradation but not improvement either.

Okay, great. And then as far as the payment rate goes, you noted that that was down sequentially and I think maybe Mike mentioned some higher rebates. If we see gas prices -- just assuming they are kind of flat at these levels -- do you think the discount rate stays flat or are you still seeing some, having to give back more to the clients or are there any big renewals coming up that could pressure that?

Well, we said that, and I think we are consistent, that most of the increase or the decrease, I am sorry, was because of the increase in the price of gas. And there was still a little bit of rebating, which I think goes on on every quarter because there is either new contracts come up or we are vying for new business.

We talked about the GSA. That was a piece of business that we had different rebates based on payment terms as an example, and if they want to pay us earlier we give them a higher rebate. But all those things still come in to play so we will continue to have probably some additional rebating going on every quarter as we are either renewing a contract potentially or if we are signing up a new piece of business.

But I think from the oil side if the price of gas stayed the same then we would probably see that be pretty flat. If anything, it may even uptick a little bit because we have renegotiated a few of the contracts. And as those kick in in the next few months, those different programs the rate may slightly go up.

Okay, sounds good. And then -- sorry just jumping around here -- on the credit losses, it sounds like that is going to be a little bit above the historical range in 4Q. I know you haven't given '10 guidance yet, but any thoughts or comments on what you are expecting for credit losses in 2010?

We will give '10 guidance on our next call. I would say in general the fourth quarter, though, is pretty consistent if you look back over our history for what we have seen in the fourth quarter. So it's higher than the annual range but it's pretty normal for --

It's still normal for seasonal --

Yes, yes.

Okay, fair enough. And then just lastly, as far as the Citi relationship goes, I mean I saw some stories in the past couple of weeks that Citi has been just going out and shutting down people's gas cards and stuff like that. Is the anything going on with that relationship, anything changing as far as you guys know with Citi's commitment to this product that might impact your relationship with them?

I don't see any changes. I think that was all on the consumer side with MasterCard or Visa programs they had. I think MasterCard, but I don't want to say it's MasterCard if it was Visa so I will try to be careful there. But all consumer related.

On what we see with the relationships with the oils, they have strong relationships. I think that is business. They are still very committed too. We don't see any change with us. I would just think there could be some repercussions though if I am oil and my MasterCard is being impacted it might impact the overall relationship, but we don't see any changes.

Okay, great. Thank you very much.

David Parker, Lazard Capital Markets.

Good morning. Thanks for taking my question. I am just hoping that you could provide a little bit more color around the state government win. Specifically what was the state agency, your penetration rate in the state government vertical, and then also any opportunities to win more state business?

Yes, we have always been aggressive going after government business. As you know, we won the GSA last year which was a big piece of the federal government. I don't know the exact count; we have 17 or 18 state governments that we service today. So every time one of those come up for renewal we are very aggressive because we think we have the ability to win that business with our different products and services.

Then as you win state business you have the ability to market it to the municipalities because they can tag on to the state government business with whoever the winner is of that RFP. So we continue to do marketing programs, especially as we mapped out the stimulus dollars, to say how can we go into those 17 or 18 states that we had relationships with trying to get the municipalities, the county governments, whatever to kind of tag on so that we would hopefully not only get their business but as they grew because of stimulus dollars see some uptick in business.

So we are aggressive in that marketplace. It's competitive like the rest of the marketplace and we hope to win more business in the future.

Okay, thanks. And then in terms of general growth opportunities going forward. When you have these new customer wins are you typically winning from a competitor that has a fuel card or a fleet that is using a competitor's fuel card or are you still taking, winning some fleets that are using general purpose cards or that are using cash?

I think it's all of that depending on the market. If you are talking the largest fleets, typically they are using one of our competitors or us. So if we are winning, we are winning from somebody else. The state government we took it from another fleet card provider.

If you enter the midmarket you will start to see all of our competitors and you will see some of even the oil company cards that maybe we don't process competing. And there is some open space, not a lot, but there is some open space. If you move down market into the small fleets, clearly there there is a lot of cash customers still today and there is still a lot of general purpose cards that are being used. So that is where the, if you will, the true open space would be those cash customers and potentially the general purpose cards.

Great. Thank you, guys.

Mr. Dubyak, it appears there are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.

Thank you, Claudia, and thanks everyone else for listening. We will look forward to speaking with you again next quarter.

That does conclude our conference call. Thank you for joining us today.