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Executives

Steve Elder - Chief Financial Officer

Mike Dubyak - Chief Executive Officer

Analysts

Sanjay Sakhrani - KBW

Greg Smith - Sterne, Agee

Bob Napoli - William Blair

Roman Leal - Goldman Sachs

Tom McCrohan - Janney

Sanjay Singh - Bloomberg Investment

Tien-Tsin Huang - JPMorgan

Wright Express Corp. (WXS) Definitive Agreement to Acquire Fleet One Conference Transcript September 5, 2012 5:00 PM ET

Operator

Good afternoon. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wright Express Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to CFO, Steve Elder. Please go ahead, sir.

Steve Elder

Good afternoon, everyone, and thanks for joining us on short notice. Today Wright Express announced that it entered into a definitive agreement to acquire Fleet One, an over-the-road and local retail fueling business from private equity firms LLR Partners and FTV Capital for $369 million in cash. A press release is now posted to the Investor Relations section of our website at wrightexpress.com.

Joining me today on the call to discuss this transaction is our CEO, Mike Dubyak. Mike will walk you through the strategic rational and details behind the transaction, and then we will open up the call for your questions.

As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income during our call. Please refer to the press release for further explanation of this non-GAAP metric.

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’ll turn the call over to Mike.

Mike Dubyak

Good afternoon, everyone, and thanks for joining us. We are pleased to announce our agreement to acquire Fleet One. This transaction represents a unique opportunity for Wright Express for several reasons.

First, the Fleet One’s fuel card products and fleet management information services are very complimentary to our business.

Second, Fleet One has a meaningful presence in both the over-the-road and local fleet markets. As a result, this acquisition materially accelerates our presence in the over-the-road market. In addition, the consolidation of Fleet One and Wright Express’ private label businesses should provide us with greater scale.

Furthermore, Fleet One products and capabilities in the heavy truck market rounds up our existing product suite to service the full spectrum of fleets.

As a growing and profitable business, this transaction will further expand our Americas fleet business, a core tenant of our growth strategy and is expected to be immediately accretive to Wright Express’ adjusted net income.

As the press release provides the key details, I will focus my comments on providing some additional color on the transaction.

I will keep these comments brief, so we can leave time as much as possible for Q&A. Steve and I will do our best to answer your questions within the confines of appropriate disclosure.

First, let me give you some background on Fleet One. Fleet One is a fuel card company with a meaningful presence in both the over-the-road and local markets with approximately 210,000 active cards that are accepted at 60,000 total locations including 6,700 over-the-road locations.

Their heavy truck market is very significant in size with approximately 4 million heavy trucks in commercial and government fleets on U.S. roads today.

Market research from (inaudible) and Company estimates that almost 22 billion gallons of fuel were consumed by U.S. heavy truck fleets with a total spend of more than $65 billion.

The U.S. heavy truck market is roughly evenly split between long-haul fleets and short-haul fleets. Fleet once OTR business has a large installed base of over-the-road trucking fleets and has produced -- has as product set with strong brand recognition.

The acquisition of Fleet One provides a unique opportunity to immediately and materially expand our OTR business in order to more effectively compete in this area of the market, which we view as a growth opportunity going forward.

In addition, Fleet One brings features and functionality to enhance the portfolio of solutions, we currently offer to our existing mixed fleet customers, including cost plus pricing options, cash advance and receivable factoring programs.

We already have a number of customers who operate mixed fleets, which include different types of vehicles ranging from cars and vans to light trucks and in some cases tractor/trailers.

Some of these customers are increasingly seeking these over-the-road features along with the services we traditionally offered. This transaction positions us more strongly to respond to these needs.

At the same time, we expect our combined assets, products and competencies to accelerate the growth in both Fleet One’s over-the-road business, as well as our private-label business, leveraging front-end sales and marketing capabilities should unlock significant growth potential by improving lead flow and close rates in the over-the-road segment.

Additionally, we believe there are strong cross-selling opportunities for Wright Express’ best-in-class product suite into Fleet One’s existing customer base.

Moving on to the financial impact of the deal, as Steve previously mentioned, the purchase price for the acquisition is $369 million in cash. The transaction is expected to generate $100 million in present value of tax benefits for us. For the last 12 months ended June 30, 2012, Fleet One generated revenue in excess of $56 million.

Looking forward, the transaction is anticipated to be immediately accretive to adjusted net income, which is a non-GAAP measure, excluding one-time charges related to the transaction.

This transaction will give us with an immediate and material presence in the heavy truck market both in the U.S. and Canada, enhance the portfolio of services that we can offer to our mixed fleets and provide us with greater scale and private label, as well as the opportunity to cross-sell existing products into the Fleet One’s customer base.

We anticipate realizing synergies from the consolidation of certain Fleet One and Wright Express business functions over time, while at the same time, building upon Fleet One strong product portfolio in the over-the-road segment.

Fleet One is a great fit with Wright Express. They have a stellar reputation for the commitment to customer service and value strong customer and merchant relationships. We believe these shared values along with the expertise we bring in our respective businesses will help us to drive the business forward. Subject to regulatory approvals and the satisfaction of other customary closing conditions, we expect the transaction to close during the fourth quarter of 2012.

In conclusion, the Fleet One’s complementary products and services suite, strong presence in the over-the-road market and a track record of financial and operational success create further opportunities for Wright Express both now and in the future.

With that, Operator, we are ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sanjay Sakhrani from KBW.

Sanjay Sakhrani - KBW

Hi. Good afternoon and congratulations. I had a few questions. Just, first, I was just wondering if you could just talk about the orientation of the customer at Fleet One. I mean, how different is it in terms of the customer profile in terms of risk and perhaps average credit line sizes?

Mike Dubyak

Yeah. Fleet One is typically working with small fleets in the over-the-road market and they are also working with small fleets in kind of the local market that we play in, local fleets having vans, light trucks, things like that. But the biggest piece of their market would be the over-the-road market.

They typically have shorter payment trends, so when you view the products and look at the amount of credit risk and credit exposure, it’s very less in terms of days outstanding, in terms of their program with the over-the-road fleets versus what we would typically see with our local fleets. Even their local fleet market has a shorter payment cycle than we typically offer in our local fleet program.

Sanjay Sakhrani - KBW

Okay. And then just in terms of like line sizes that you would grant to those companies?

Mike Dubyak

Well, again, I guess it depends. I mean we’re still going to look at credit risk the same way we look at credit risk today. We do have some over-the-road fleets today, not much, but I think we would still use some of our risk parameters and risk metrics in terms of assessing what lines we would grant and that may determine in some cases, what are the credit terms we would offer that fleet. In some days - in some cases it maybe same day payment.

Sanjay Sakhrani - KBW

Okay. I got it.

Steve Elder

Sanjay, this is…

Sanjay Sakhrani - KBW

And maybe just a couple on the financials, just thank you for the revenue number of $56 million, but could you just talk about how accretive it could be or maybe just some operating margin parameters, how different is it from the operating margin of your existing book?

And then just on the tax benefit, over what period of time is it realized and where is it exactly coming from and then just, is this deal accretive ex the tax benefits? Thanks.

Steve Elder

Sanjay, this is Steve. I’ll take that one. So, just like Wright Express Fleet One is a very profitable company on a standalone basis. That said, their EBITDA margins are a little less than the 46% we have seen year-to-date this year through Q2. So you can kind of get your modeling from that.

We do expect that the synergies over time that we expect, as we integrate this company will bring those two margins closer to each other. In other words, we’ll bring those up a little bit overtime as we realize the synergies.

And then along the lines of the tax step up essentially, it’s a lot like what’s currently on our balance sheet today going back to our IPO. In other words, we’re going to get tax basis from this transaction in goodwill and for tax purposes, goodwill will be deductible over 15-year period of time. So that equates to about $9 million annually in cash savings that we’re going to have in our taxes.

So it won’t show up in our income statement anywhere. It will essentially just come through in our cash flow statement. That $9 million annually equates to $0.22, $0.22 to $0.23 per share.

But the company, even without that, is profitable. In all of these numbers that I’m throwing out there around margins and all of that, that will, excluding the one-time cost associated with closing the deal.

Sanjay Sakhrani - KBW

Okay. Got it. And then, I’m sorry, just one final one. How fast do you think you could garner those synergies, is it year one or year two?

Steve Elder

I think it will be over a period of time. There will obviously be some low hanging fruit that we can get pretty quickly, but there’s going to be some longer-term stuff too that will take a couple of years.

Sanjay Sakhrani - KBW

Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Greg Smith from Sterne, Agee.

Greg Smith - Sterne, Agee

Yeah. Hi. Hey, Steve, what should we assume for the cost-of-debt on your credit line right now?

Steve Elder

The, upon -- around closing we’ll have about 2.25 times leverage, so that will put us at around LIBOR plus 200 basis points on our current pricing grid with the facility we have.

Greg Smith - Sterne, Agee

Okay. And then, I just want to be sure, the way they fund, how do they find their transactions or how do they fund the receivables currently?

Steve Elder

Today they have a special purpose entity that’s essentially like a securitization line. Overtime, we’re going to migrate all of these contracts over to our bank. So that they will be the -- funding the transactions, the official issue of the credit. It won’t happen on day one but it will overtime.

Greg Smith - Sterne, Agee

And can we get just some background on the transaction was this -- I assume this was a competitive situation, probably an auction or am I wrong on that. Any background on just, how long these talks went on as well?

Mike Dubyak

Yeah. It was a process. So we were part of others that were bidding for the assets.

Greg Smith - Sterne, Agee

Okay. And then just one last one, while we have you guys, just any update on kind of current volume trends and what you’re seeing. Are there any -- have they varied much from when we last spoke on the last quarter earnings call?

Mike Dubyak

I would say volume trends have not moved a whole lot. No.

Greg Smith - Sterne, Agee

Okay. Thanks guys.

Operator

Your next question comes from the line of Bob Napoli with William Blair.

Bob Napoli - William Blair

Thank you and congratulations. I think it’s a nice thing for you guys. Just to be clear Steve, that I mean, this deal is accretive on an operating adjusted income basis excluding the tax benefit. I think it is pretty clear that the tax benefit 100 million overtime is that right?

Steve Elder

That’s all correct Bob.

Bob Napoli - William Blair

Okay. And I guess I wasn’t totally clear on the revenue model for Fleet One. Is it pretty much the same, is it all tied to fuel prices the same as Wright Express or is there some that’s transaction-based?

Steve Elder

There is definitely some that’s transaction -based. About 75% of the revenue is coming from the over-the-road segment and 25% is coming from the local fleets and private label processing that they have.

If you look at their revenue overall, it’s about 60% is influenced by fuel prices and 40% is a mixture of other services that are essentially transaction-based fees or fee-for-service kinds of things.

Bob Napoli - William Blair

Okay. And will you be -- are there members -- key members of the management team that are going to remain with Wright Express from Fleet One that will join Wright Express?

Steve Elder

Yeah. We are still working through a lot of that with management. Clearly, there is going to be a consolidation play. But we’re going to be sitting down with them. We’ve already had a lot of discussions naturally. But the hope will be working together. We’ll come up with what’s the right way to do the consolidation and some of the management team I’m sure will still be working with us in one fashion or another short term and long-term.

Bob Napoli - William Blair

Yeah. I think -- imagine this is a pretty easy consolidation given that it’s in the U.S. What is the -- where are the risk or the systems risks? Where on the integration side risk, what are the biggest issues?

Steve Elder

No. I think for us we feel very comfortable. If you look at their business, as I said they have the local fleet which is very similar to what we do. They’ve got 60,000 locations. We have 150,000 locations but the products are very similar. We think there is ways to find synergies very quickly with that.

On the over-the-road, they are doing different things there. We were building it. They have a complete product. So we’ll look at what synergies are there between the platforms. But we do know that, their program today is very robust and it’s already matured and build up. So we’ll be looking at how we can help them in terms of synergies. But probably the over-the-road is, it’s not risky, it’s just that is a different product.

Bob Napoli - William Blair

Last question, once you’re done integrating, shouldn’t this be accretive to operating margins? I mean, your incremental margins are far above the 46%. I believe that you’re currently generating. So shouldn’t this as its fully integrated be accretive to operating margins or is there something about the over-the-road business that would prevent that?

Steve Elder

I would say that, I mean, there’s nothing structural about the over-the-road business that would prevent that from happening. It will -- we’ll see what it looks like in a couple of years I guess.

Bob Napoli - William Blair

Great. Thank you.

Operator

Your next question comes from the line of Jeff Glaser with Goldman Sachs.

Roman Leal - Goldman Sachs

Hey, it’s actually Roman Leal here. Thanks for the call and the transaction. A couple of follow-ups. There was another transaction U.S. Bank acquired another company in the over-the-road segment. Just wondering how this changes the competitive landscape? How competitive is it now posts this acquisition of yours?

Mike Dubyak

Well, in terms of the over-the-road, there is a number of players but not that many players that are in the market today. I don’t think it changed the competitive landscape. They are focused on smaller fleets, which we all we said is a big piece of our focus and that’s both in the local market that we talked about, as well as the OTR market.

And their value proposition plays very well in the local fleet market place. And we’re going to continue to focus there and then just see where we can bring opportunities to move their product into our mixed fleets as well as move into some of our co-branded fleets.

Lot of our co-brand partners do leasing to heavy trucks and more and more of those co-branded partners are looking at more truck business in the future. So we think that helps and they give us access to Canada as well for any of our leasing partners that need heavy truck presence in Canada.

So I think if anything, the market is available and the small fleet market to go after. And we think they have a good product set and we’ll try to help them in some of the other markets where we have strengths.

Roman Leal - Goldman Sachs

Okay. And did you quantify the cost synergies or is there is a way of maybe provide us some examples of where those passengers will come from?

Mike Dubyak

Clearly a piece of that will come from the consolidation where we think there is redundancies with numbers of people. So we have structures in place. They have structures in place. We will be working with them to look for areas of excellence and we’ll find those operational efficiencies.

So that’s probably the biggest and then there are areas like marketing and sales where we probably will defer through finding best practices on what they do over-the-road but also the news are marketing and sales to some extent for the small fleet business but they’ve been very successful. So again we are going to make sure we look for the best opportunities to leverage their excellence versus our excellence in both areas.

Roman Leal - Goldman Sachs

Okay. And then lastly just on cap allocation how -- just remind us what the general strategy is. You announced two acquisitions in a short period of time, just wondering if that’s just a reflection of a change in stance towards acquisitions or is this just few opportunities that came down in a short period of time?

Mike Dubyak

Well, I think we’ve been very clear that we had a pipeline. We’ve been very clear that we’ve been looking to do some acquisitions and we’ve been paying down debt. We’ve said we’ve also been using the lens of our strategic focus.

We talk about the three areas that we want to focus on, that is the America’s fleet. This is very strategic to that to round out our product set. We want to look at diversification in going international. And if you look at the unique operation in Brazil, it’s both a diversification opportunity and an international opportunity. So I think it’s consistent, it just happened to be that they both matured at the same time basically.

Roman Leal - Goldman Sachs

Great. Thank you.

Operator

Your next question comes from the line of Tom McCrohan with Janney.

Tom McCrohan - Janney

Hi. Thanks for taking the question. Most of my questions have been answered. I just had a question on the price pay. You didn’t provide an EBITDA number, but can you just give us a sense for kind of the multiple pay EBITDA for this entity and how you got comfortable with the price? Thanks.

Mike Dubyak

Tom, I’d say us and our advisors, we look at a bunch of different metrics and valuation techniques, the discounted cash flows, the public company comp, other transactions in the space of internal rate of return, net present value all those kinds of things. And we do feel pretty confident and comfortable with the price that we pay.

Operator

Your next question comes from the line of [Sanjay Singh] with Bloomberg Investment.

Sanjay Singh - Bloomberg Investment

Hey, Steve. Hey Mike. Thanks. But I think you answered all my questions, Steve, so I appreciate it. Thanks a lot.

Mike Dubyak

Thanks, Sanjay. Thank you.

Operator

Your next question comes from the line of Greg Smith with Sterne, Agee.

Greg Smith - Sterne, Agee

Guys, some follow-up here. Steve, when you say LIBOR, are you talking one month or a year, just there’s a slight difference there?

Steve Elder

We typically use one month.

Greg Smith - Sterne, Agee

Okay. Great. And then the tax benefit here, is this specific to Fleet One? I mean, this isn’t NOLs they had, is this just -- would you get the same benefit for any other similar acquisition? I’m just a little confused on the tax benefit you’re calling out here.

Steve Elder

It’s not NOLs. It comes down to their kind of prior ownership or actually current, I guess, until the transaction closes. Their ownership structure, which essentially comes down to being a partnership. It’s an LLC but essentially it’s treated like a partnership because of that structure that we are able to recognize that.

Greg Smith - Sterne, Agee

Okay. So it is very specific to Fleet One. Okay. And then the last question, just as we think about the OTR market, is the opportunity there just a market share gain or is there a secular opportunity where there is still sort of non-fleet specific cards being used I mean, what’s the biggest opportunity. Is it the secular shift to cards or is it just a market share game against competitors?

Steve Elder

It’s primarily a market share gain. I mean, I would say that the heavy truck market does have a lot of card presence. So it’s not like there is people using cash to do transactions as you would see in the local small fleet marketplace which is that I think they play very well in the small end wither their product suite.

And even as we talk about moving it into say our mixed fleets or the co-brands, I just think because of our relationships and now that we can bring them a full product suite we have the opportunity hopefully to secure their business, but again we’ll probably take it from another card product.

Greg Smith - Sterne, Agee

Okay. Thank you. I appreciate it.

Operator

Your next question comes from the line of Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang - JPMorgan

Hey, good afternoon. Just I got in a little bit late, because there was another earnings calls but could you go over any customer concentration that we should be aware of?

Mike Dubyak

No. there is no -- I mean, they have some private labels that are probably their largest customers in terms of size but in terms of their private label customers, we know who they are, people like SuperAmerica has sold their portfolios or something that we are used to dealing with and used to having those sort of relationships.

On the true fleet size, most of their customers are small. They have some reasonable size customers as well but there is no major concentration risk.

Tien-Tsin Huang - JPMorgan

Okay. Great. Great. And then just the plans on hedging the fuel exposure that you discussed there and I apologize if you did?

Mike Dubyak

No. I think Tien-Tsin, we will kind of take -- take their exposure and evaluate it in the context of our overall program. It’s an important part of our strategy. They do have about roughly 60% of their revenue have some fuel price impacts, but we will -- we are kind of look at it in the totality of the program that we have and make some decisions from there.

Tien-Tsin Huang - JPMorgan

Okay. Now that makes sense. Last one just in general, just curious about, I know you have given more details later, but just generally seasonality, how cyclical has the business been and just on the funding side if there’s anything unusual to call out there? Thanks.

Steve Elder

I would say, it’s….

Mike Dubyak

There is no doubt they are in the heavy truck business. And like us, they are sensitive to the economy in some cases maybe a little more sensitive if the economy changes but I think its still again something we see through the course of our other SIC codes as well. So I think people see a see a lot of difference except that they will have more sensitivity if the economy changes.

Tien-Tsin Huang - JPMorgan

Okay. Great. Thanks so much.

Operator

Thank you. I’d now like to turn the call back over to Mike Dubyak.

Mike Dubyak

Well, I want to thank everybody again for joining us in this late notice. And we look forward to giving you more information as we report our results for the third quarter. So thanks for joining us on the call. Talk to you soon.

Operator

This concludes today’s conference call. You may now disconnect.

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