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# WEX Inc. Message Board

• monty_a100 monty_a100 Mar 15, 2006 12:21 AM Flag

## Look closely at the cc and figures!

I listened to the cc replay and in particular concentrated on the comments in relation to the Select Comfort contract. The following points came out.

1. There is currently no agreement with Select Comfort after August 2006.

2. WEX is in the process of attempting to negotiate a new agreement. The goal is a 3 year contract.

3. Kreuger acknowledged that the margins will not be as good under a new contract if they get one.

Observation. If there is only one other company seeking business, and Select Comfort is not going to give one supplier more than 50% then there is a good chance that WEX will get a second contract. If however, there are other players, there is a chance that WEX may not be able to achieve any contract at all. Even if it gets a second contract margins are down. The best case scenario is a contract for half Select Comfort requirements but with a reduced margin.

Note also that during 2005 Select Comfort was 54.4%. This has fallen from 58.8% in financial year 2004.

In order to demonstrate the gravity of the announcement, I have made some assumptions and applied them to the 2005 year. These are for illustration only and I have added some caveats at the bottom. However, those posters who have dismissed the consequences of the impending change are running a risk of being disappointed.

Full year revenues for 2005 were \$25,105,626.
Current Gross Margin \$7,232,447 (28.8%)

Assuming that the Select Comfort contract is renewed, but the margin is reduced, the following is assumed:

Half the Select Comfort Business = \$6,828,731.
On the contribution margin, this contributes a gross Margin of 1,966,675.
If Price is reduced by 5% this reduces gross Margin as follows:
5% of \$6,828,731 = \$341,437.

Therefore if 50% supply contract is achieved the Margin Contribution would have been \$1,625,239.

Therefore if one takes the other contribution of the other half (\$1,966,675) which will be lost, together with the reduced margin, (\$341,437) the total reduction in Gross margin is \$2,308,112.

Applying that to the current year would have eliminated the profit.

(continued)

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• Just for clarification purposes, Winland will get 7 months of normal selesct business and then the last 5 months they will get 50% of the business. So assuming the total select business grows at 15% a year then the \$15.6m for '05 would grow to around \$18M. WEX will get \$10.5m for the first seven months of '06 and then they will get 50% of the remaining \$7.5m for total revenue from select in '06 of \$14.25m. As you can see the impact on top line of '06 will not be significant and the two large contracts of \$4.5m and \$1.7M had the majority of those purchase orders in early '06 with both coming up for re-orders by April/May time frame. As for the new contract I do not think that they would get into specifics of the structure of the deal and risk making someone over at Select angry if they did not have the business in hand. As far as what that margins are with Select that has never been disclosed by the company for competitve reasons.

• monty -

Interesting anlysis, and gives one something to ponder. However, I think that you are being a tad too pessimistic. I would look come at it from a different angle.

Revenue has been growing at about 17% clip over the past 3 years and over 20% for the past two. The growth rate for non-SCSS revenue is even faster since the % of total revenue for other customers has grown. I should do the math and figure out the exact growth rates but I'm too lazy.

Therefore if we assume that the non-SCSS revenue grows by 20% (and with 60 new products and recent history, this should prove conservative) then by 2007 when the major impact on SCSS take place, this revenue will grow from \$13.4M to \$19.3M. Add to this 50% of the SCSS business (I'll go along with a 5% reduction in price) and you have another \$7.5M. This does result in a revenue drop from \$29.1M to \$26.8M, but this would still be the second highest revenue amount in the company's history, so they should still be able to maintain profitability and then grow from this new more diversified base. Also, this does not assume that the total Select Comfort business grows, which would lead to more than \$7.5M in sales to them as the 50% (times .95 to account for the lower pricing) of the larger pie might be more like \$10.0 (assuming 15% growth per year). This would result in total revenue of \$29.3M.

This is all speculation, but to my way of thinking it is as likely as your results. Where did you get \$25,106k in revenue for 2005? I'm not sure how this table will look pastred in, but I see \$29,106k.

4th quarter ended 4th quarter ended
12/31/2005 YTD 12/31/2004 YTD
Sales \$7,563 \$29,106 \$6,573 \$24,199
Net Income \$671 \$2,049 \$416 \$1,090
Average Shares 3,636 3,626 3,559 3,526
EPS \$.19 \$.57 \$.12 \$.31

• red_wombat80

You are correct. My mistake. Typing late in the night. The total Sales were \$29,105,626. Thank you.

As I said though, I want to see the 10-K before I give some more concrete figures. I was just trying to promote a closer look at the figures after I heard the conference call. My main concern is that it appears to be a race against time. I agree that the sales have been growing quickly, but I am also interested to get a handle of the EMS contribution against the proprietary contribution. Even if the proprietary products had a 50% margin, at 11% of total sales it will still need a lot of leg-work to make up the difference. Furthermore, as Kreuger mentioned, the 4th quarter contribution is misleading because of the sales mix which arose because of the timing differences with orders from different customers and their own products. So it is not so much the headline sales figure which bothers me, it is the gross profit margin. Kreuger made several comments about competitive pressures and it is obvious a problem in the EMS area. He was asked if the other supplier for SCSS was local or offshore and he responded that he knew who it was but was unable to disclose.

I'm, not trying to put any particular spin on things. I'm actually optimistic by nature. I'm just trying to get a handle on the situation and am sharing my thoughts because a number of posters like yourself have also taken the time in the past have shared your own insights.

Good Luck

Monty.

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