Fleetcor Technologies Inc

NYSE:CPAY

Earnings Call Transcript 2018-Q2

[Operator]

Greetings, and welcome to the FLEETCOR Technologies, Incorporated Second Quarter 2018 Earnings Conference Call. As a reminder, this conference is being recorded.

I would like to turn the conference over to our host, Mr. Jim Eglseder, Head of Investor Relations for FLEETCOR Technologies. Thank you, sir. You may begin.

[James P. Eglseder, FleetCor Technologies, Inc.]

Good afternoon, everyone, and thank you for joining us today. By now you should have access to our second quarter press release and supplemental presentation, which can be found on our website at www.fleetcor.com, under the Investor Relations section.

Throughout this conference call, we will be presenting non-GAAP financial information, including adjusted revenues, adjusted net income, and adjusted net income per diluted share. This information is not calculated in accordance with GAAP and may be calculated differently than other companies' non-GAAP information.

Quantitative reconciliations of historical non-GAAP financial information to the most directly comparable GAAP information appears in today's press release and on our website as previously described. Also, we are providing updated 2018 guidance on both a GAAP and non-GAAP basis, along with reconciliations.

Finally, before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. This includes forward-looking statements about our 2018 guidance, new products and fee initiatives, expectations regarding business development and acquisitions, and statements regarding the unauthorized access to the company's systems, including assumptions with respect to the investigation of the incident to-date. They are not guarantees of future performance, and therefore, you should not put undue reliance upon them.

These results are subject to numerous risks and uncertainties which could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today's press release on Form 8-K and on our Annual Report on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website and at www.sec.gov.

With that out of the way, I would like to turn the call over to Ron Clarke, our Chairman and CEO. Ron?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Okay. Jim, thanks and thanks everyone for joining the call today. Upfront here, I plan to cover two subjects. So first, I'll provide my perspective on the quarter along with some updated guidance for 2018. And second, I'll talk about the progress that we're making in positioning FLEETCOR for the long term.

Okay. So on to the quarter, our Q2 results were quite good. We outperformed our internal expectations in both revenue and earnings, reporting Q2 revenue of $585 million, up 15%, that's if you adjust 2017 per ASC 606. Our Q2 cash EPS was $2.57, up 29%. So, 15% top line, 29% bottom line. So, the last three quarters of cash EPS profit growth have been 28%, 28% and now 29%. So, not bad.

The macro not particularly helpful this quarter versus our expectations. So although we enjoyed pretty good fuel prices in the quarter, FX worsened considerably, spreads narrowed a bit, interest rates rose and even our effective tax rate came in a bit worse than planned. So in total, these macro factors resulted in approximately $10 million of negative revenue impact and about $0.05 of negative cash EPS impact in the quarter versus our guidance. So, the macro hurting our results a bit.

Let me turn to organic revenue growth in the quarter, which penciled out at 9% in aggregate, and just run through that. So first, fuel card organic growth improved to 5% from 1% in Q1. International fuel card growth was 8%. Inside of that, Russia grew 29%. Here in North America, our trucking fuel business grew 20%, cardlock business way up. So, lots of good fuel card performances.

Unfortunately, the offset remains our U.S. local and partner business still impacted negatively by last year's GFN conversion and the weakening Chevron portfolio. Corporate Payments, very good quarter, up 20%. Inside of that, the construction vertical up 30%, our core virtual card business, our direct business up 24%, the payroll card business there way, way up. Cambridge posted mid-teens growth. So really very solid Corporate Payments.

Toll, 20% in Q2, that was driven 5% by higher average tags or volume, along with higher prices for our higher-usage customers. The truckers strike did depress transactions and spend above 5% in the quarter, but had very little impact on Q2 Toll revenue because of the subscription basis there. The new Toll sales in the quarter good, up 16% over last year.

Lodging rocked in the quarter, driven by SMB room volume, which was up over 30%. That was helped by our digital booking tool. The large hotel segment remained healthy. The same store there, plus 3%. And the hotel tuck-in from last summer grew terrific, up over 30%. So, Lodging firing on all cylinders.

Our gift card business, not so good, posted a 19% decline in the quarter. Fortunately, the core transaction volume and processing revenue, which are ratable, did come in on plan and flat with the prior year. So, all of the decline, all of the softness was attributable to some big card orders that got pushed into Q3. So, our view is the decline is really just a timing issue and that SVS for the full year of 2018 should be basically flat with full year 2017.

In terms of trends in the quarter, quite positive. New sales, new business, up 14% versus the prior year. And inside of that, more new fuel card sales than ever before, so a record level of fuel card sales. Same-store customer growth positive at plus 2%. Customer retention, again above 90%, that makes 13 consecutive quarters of 90% plus.

We did repurchase about $300 million of FLT stock in the quarter. That brings our repurchases since 2016 to about $1 billion. Our board increased our buyback authorization in our last meeting by another $500 million. We're also really delighted to be named to the S&P 500 Index. Feels good to be recognized for a lot of hard work and consistent performance over a long period of time. So look, the story of the quarter, good revenue and profit growth, improving fuel card organic growth and really good trends, good sales and good retention.

Okay. Let me transition over to our rest of year guidance. So, today we're raising our full year 2018 cash EPS guidance at the midpoint by $0.07 to $10.42. So, the $10.42 updated full year guidance would result in 22% profit growth for full year 2018. Important to note that this updated guidance assumes quite a bit weaker macro environment in the second half than we had thought, say, 90 days ago. We're now estimating approximately $30 million to $40 million of negative revenue impact rest of year, driven predominantly by the worsening of FX, a bit more unfavorable interest rates, both of which will more than offset the favorable fuel price.

Despite the weaker macro, the fundamental performance should be pretty sound, though, rest of the year. We expect overall organic revenue growth in the 8% to 10% range in Q3 and Q4, and likely a 9% full year 2018 organic growth number. We do expect the fuel card organic growth to accelerate to about 8% by Q4 and our non-fuel lines of business to likely moderate into the mid-teens rest of year, as they lap some second half pricing and absorb some big contract renewals.

Okay. Let me shift gears and talk a bit about the positioning of FLEETCOR for really long-term sustainable growth. So, a few areas. So first up is the portfolio or the sandbox in which we play. So, as most of you know, we started out as a pure fuel card provider and now look more like a diversified business payments company. So, initially, fuel cards and now really a whole line of specialized business expense cards and networks; so in addition to fuel, toll, parking, hotel, food, payroll, even commuter cards. So, a variety of spend categories.

And then second, we've entered the Corporate Payments or general payables space with digital offerings to automate AP and even pay international AP. So, this creates certainly a bigger sandbox that has a larger market potential and gives the company a much, much longer runway. We're, obviously, doing well in the new diversified areas, newer categories. Our three non-fuel lines of business growing over 20% year-to-date.

We still got more portfolio work to do. We hope to extend the geographies in which we play, specifically in the Continental Europe and Asia. And we do continue to explore a new idea for SVS that could help accelerate the company's overall growth. So look, lots of progress, structuring a bigger, broader and more diverse company.

Second area of progress is in building a global sales machine. So, we think sales is the single most-important asset for a company like ours, and we built a pretty big machine. We're now selling hundreds of millions of dollars of new business each year. And to us, that demonstrates winning. And we're doing it through a variety of sales channels; field reps, telesales reps, digital channels, third-party retailers and through a host of partners.

We're also spending about $200 million in sales investment this year, and getting pretty really good productivity, pretty good efficiency from that. We've rotated sales pretty hard to digital. In Q2, approximately 40% of all our global fuel card new sales were from the digital channel, so that is up substantially.

We're making new investments this year in sales enablement. Those are ways to soften the beach to make selling easier. We're also investing in a new channel sales group that will explore sales opportunities with new partners, including merchant acquirers, insurers and even travel management companies. So look, we've developed a pretty impressive sales asset and we're continuing to build it out.

And then lastly, we're making pretty good progress on the new product front and customer experience front, and have initiatives going on really in virtually every line of business. So, in fuel, we talked about our beyond fuel programs, and our local and trucking business. Those take the form of our BuilderPro construction program; and in trucking, our OnRoad Card. Both of those offerings are gaining traction now and they literally doubled the revenue from a customer, so quite exciting.

We're launching what we call an AP or accounts payable companion card. That's designed to capture just the general AP spend that our fuel card clients would have. So, early take rates on that campaigning card are good. I mentioned before we've implemented a new simple fuel card UI for about 100,000 of our customers here and in the UK

In Brazil, we've launched Fuel First. That's our program to take the toll technology and repurpose it for refueling and parking, and to target non-toll users, which is a really big unserved segment for us. So, we're in the process of building out the fuel acceptance network. So, we've got 500 Shell stations and now we're starting to build out the Petrobras accepting locations. We're working on a plan to double our parking lot acceptance, and we're even testing fast food payments. So, the idea is to have extended networks beyond toll and target non-toll users, so a big opportunity.

In hotel, the digital booking tool that we've rolled out is now responsible for third of all of our SMB hotel rooms booked, growing every quarter. In Corporate Pay, we did launch officially our ASAP, fully automated payable service for small business, so a complete AP outsourcing solution, every bill that the company has. And so, all of these product initiatives expand again the market potential and allow us to serve unserved customer segments.

So look, in closing, yes, we're still a fuel card company at our core, about 45% of our consolidated revenue, but we're expanding the line of specialized business expense cards and networks, clearly beyond fuel. We're building a pretty big global selling machine and we're introducing a host of new products to open up customer segments.

We're also still pretty good at acquisitions, finding them, buying them and improving them. So, all of these activities are aimed at building a bigger, better, stronger and more sustainable company as we go. So we think that bodes well.

All right. So with that, let me turn the call back over to Eric to pick up on the quarter. Eric?

[Eric Richard Dey, FleetCor Technologies, Inc.]

Thanks. Before I get started on the numbers, I want to remind everyone that the company has adopted a new revenue recognition standard ASC Topic 606 via the modified retrospective method of adoption effective January 1, 2018.

Under this method 2017 results are not restated. In my revenue discussion to follow, as I did last quarter, I will talk about revenue in two ways. First, using a new GAAP convention, which compares 2018 using the new ASC 606 standard to 2017 using the prior standard. And then I will discuss revenue for 2018 and 2017 as if ASC 606 was never adopted, so you can compare revenues the way we have historically presented it.

Now on to the quarter. For the second quarter of 2018 on a GAAP basis under the ASC 606 standard, we reported revenue of $585 million, up 8.1% compared to $541.2 million in the second quarter of 2017. As a reminder, merchant commissions and certain third-party processing expenses are now netted against revenue, which resulted in a reduction in revenue of approximately $23 million in the second quarter of 2018 versus the prior standard.

For the second quarter of 2018, GAAP net income increased 35% to $176.9 million or $1.91 per diluted share from $131 million or $1.39 per diluted share in the second quarter of 2017. Non-GAAP financial metrics that we'll be discussing are revenues excluding the impact of the new ASC 606 standard to provide comparable revenue amounts between periods and adjusted net income, which we sometimes also refer to as cash net income or cash EPS.

A reconciliation of GAAP revenue using the new ASC 606 standard to the prior revenue convention is provided in Exhibit 7 of our press release and adjusted net income to GAAP numbers is provided in Exhibit 1 of our press release.

Revenues in the second quarter of 2018 excluding the impact of ASC 606 were $608.3 million, up 12.4%, compared to $541.2 million in the second quarter of 2017. Adjusted net income for the second quarter of 2018 increased 27.1% to $237.8 million compared to $187 million and adjusted net income per diluted share increased 29.2% to $2.57 compared to $1.99 in adjusted net income per diluted share in the second quarter of 2017.

Second quarter results reflect the impact of a mixed macroeconomic environment compared with the second quarter of 2017. Movements in foreign exchange rates were primarily negative particularly towards the end of the quarter. We believe it negatively impacted revenue during the quarter by approximately $6 million. Fuel prices were mostly favorable during the quarter, and although we cannot precisely calculate the impact of these changes, we believe, positively impacted revenues by approximately $13 million.

And finally, fuel spreads had about a $7 million negative impact in the quarter. So in total, those changes were approximately neutral to our second quarter revenue compared with the second quarter of 2017. Relative to our prior guidance, the macro negatively impacted our revenues by approximately $10 million in the quarter, driven primarily by unfavorable movements in foreign exchange rates, mostly in Brazil during the latter part of the second quarter.

We delivered another quarter of solid organic growth, up 9% overall. Most of our major product categories performed well during the quarter. Our fuel card business rebounded to 5% growth and would have been approximately 8% if not for the negative impact of the conversion issue or a portion of the MasterCard portfolio in 2017 and Chevron in the quarter. As expected, we started lapping the conversion issue at the end of the second quarter of 2018 and are well on our way to the normal range of upper-single-digit growth by the end of the year.

Our Corporate Payments category continues to perform well and was up 21% organically during the quarter. The growth in Corporate Payments was driven by both our Comdata and Cambridge businesses, which continued to produce very good results.

Our Toll business was up 20% organically due primarily to a number of growth initiatives implemented throughout 2017 and 2018 at STP. Our Lodging business was up 27% driven primarily by an increase in room nights and continued FEMA rooms due to the impact from hurricanes. The FEMA impact contributed about 4% of the growth. And finally, our gift business was down approximately 19% organically in the quarter due primarily to the timing of card orders.

In the second quarter of 2017, we received a number of card orders which we expect to receive in the third quarter of 2018. So, in summary, another very good quarter for our nonfuel businesses.

I would remind you that organic revenue growth has been calculated assuming that ASC 606 was implemented in January of 2017 in order to calculate organic growth using a consistent revenue standard in both periods.

Now moving down the income statement, total operating expenses for the second quarter were $320.2 million compared to $325.2 million in the second quarter of 2017. Included in the second quarter of 2018 was the impact of ASC 606 which netted approximately $23 million of merchant commission and certain processing expenses against revenue.

Excluding this impact, operating expenses would have been up approximately 5.6%. The increase was primarily due to acquisitions completed in the second half of 2017. Additionally, we incurred $1.7 million of expenses in conjunction with the previously announced unauthorized access.

As a percentage of total revenues, operating expenses were approximately 54.7% compared to 60.1% in the second quarter of 2017. Again, excluding ASC 606, operating expenses as a percentage of total revenue would have been 56.6% in the second quarter of 2018.

Credit losses were $14.5 million for the second quarter or 6 basis points compared to $14.7 million or 9 basis points in the second quarter of 2017. Depreciation and amortization expense increased 6% to $68.6 million in the second quarter of 2018 from $64.7 million in the second quarter 2017. The increase was primarily due to acquisitions completed in 2017.

Interest expense increased 39% to $33.2 million compared to $23.9 million in the second quarter of 2017. The increase in interest expense was due primarily to the impact of increases in LIBOR and additional borrowing for the Cambridge acquisition and share buybacks.

Our effective tax rate for the second quarter of 2018 was 23.5% compared to 31.2% for the second quarter of 2017. The reduction in the tax rate was primarily due to the effect of U.S. tax reform, which went into effect on January 1, 2018. As a result of U.S. tax reform, the federal statutory income tax rate was reduced from 35% to 21%. The reduction in our effective tax rate due to the change in the federal statutory rate was partially offset by higher U.S. federal taxes related to the new GILTI tax and higher state income taxes both resulting from U.S. tax reform.

Now, turning to the balance sheet, we ended the quarter with $1,185 million in total cash, approximately $266 million is restricted and consists primarily of customer deposits. As of June 30, 2018, we had $3,778 million outstanding on our term loans and revolver and approximately $444 million of undrawn availability. We also had $939 million borrowed in our securitization facility at the end of the quarter.

We purchased approximately 1,450,000 shares of common stock in the second quarter for approximately $292 million. The board has authorized an additional $500 million increase in the share buyback authorization and we now have $629 million in total capacity.

As of June 30, 2017 our leverage ratio was 2.34 times EBITDA, which is well below our covenant level of 4 times EBITDA as calculated under our credit agreement. We intend to use our future excess cash flow to temporarily pay down the balance on our revolving credit facility and securitization facility and maintain liquidity for acquisitions and other corporate purposes. Finally, we are not a capital-intensive business, spending approximately $19.4 million on CapEx during the second quarter of 2018.

Now on to the update for the outlook for 2018. We are raising our 2018 guidance to reflect our strong second quarter results compared to our prior outlook even with the unfavorable macro that we now expect for the remainder of the year. We believe that negative movements in foreign exchange rates mostly in Brazil during the latter part of the second quarter will more than offset the impact of favorable fuel prices producing an overall unfavorable impact on second half revenue of approximately $30 million to $40 million, which is reflected in our updated full year revenue guidance.

The good news is we believe we can offset the unfavorable macro through continued over-performance in some businesses, expected lower expenses and the impact from a lower share count in the second half. Please refer to our second quarter earnings call supplement for additional information regarding our guidance.

So with that out of the way, our guidance is as follows: total revenues including the adoption of ASC 606 to be between $2,365 million and $2,415 million; net income to be between $720 million and $740 million; net income per diluted share to be between $7.75 and $7.95; revenue excluding the impact of ASC 606 to be between $2,470 million and $2,520 million; adjusted net income to be between $960 million and $980 million; and adjusted net income per diluted share to be between $10.32 and $10.52.

Some of the assumptions we have made in preparing the guidance include the following: weighted average fuel prices equal to $2.88 per gallon average in the U.S. for those businesses sensitive to the movement in the retail price of fuel for the balance of the year; market spreads equal to the 2017 average; foreign exchange rate equal to the seven-day average as of July 1, 2018; interest expense of $135 million; fully diluted shares outstanding of approximately 93 million shares; a tax rate of 22% to 24%; and no impact related to acquisitions or material new partnership agreements not already disclosed.

In terms of guidance for the third and fourth quarters, I want to remind everyone that the company's revenue and profits normally builds sequentially throughout the year, resulting in higher revenue and profit in the third and fourth quarters. For the third quarter, we are expecting adjusted net income per diluted share to be in the range of $2.60 to $2.70.

And finally, I want to give you an update on the unauthorized access reported last quarter that primarily involved the company's Stored Value Solutions business. As a reminder, the company took prompt action to investigate and terminate the unauthorized activity. The company through counsel properly engaged external experts and information technology forensics to assist in the investigation and the remediation and further enhancement of our systems to prevent future unauthorized access.

The company also contacted federal law enforcement and merchants known to be affected. The investigation has now been concluded. And we can report that based on the findings of the investigation, we believe the unauthorized access was limited to what was reported earlier. We do not expect the unauthorized access to have a material impact on the company's results of operations.

With that said, operator, we'll open it up for questions.

[Operator]

Thank you. At this time, we will be conducting the question-and-answer session. Our first question is coming from the line of Bob Napoli with William Blair. Please proceed with your question.

[Robert Paul Napoli, William Blair & Co. LLC]

Thank you. Good afternoon. Good job on the quarter. The guidance adjustments, where did you outperform fundamentally versus your expectations to enable you to adjust the guidance despite the negative macro?

[Eric Richard Dey, FleetCor Technologies, Inc.]

Yeah. Hey, Bob. This is Eric. Effectively, it's a number of things that's driving the second half revenue guidance. One, obviously, you heard us talk a little bit about the macro. Obviously, it's mostly FX rates in Brazil, which are causing the macro headwind, so about $30 million to $40 million of unfavorable macro. Partially offsetting that is some over-performance – continued over-performance in a couple of our businesses, more specifically like our Corporate Payments and our Toll businesses, some of the businesses that have performed well through the first half. We're going to expect to see those businesses to continue to perform well in the second half.

Then in addition to that, we're going to help offset the impact of that by – we have lower expenses. If you recall, I mean, because our revenue is being impacted by unfavorable FX rates, our expenses are favorably impact by unfavorable FX rates. So effectively that's driving our expenses lower in the second half. So again, about half of the unfavorability in revenue from FX we're going to claw back in expenses in the second half. And then a little lower expense – spending in some other areas as well. And then finally we'll have a lower share count in the second half because of the share buyback.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Hey, Bob, it's Ron. Let me just add, it's about $0.15. We're absorbing about $0.15 of macro in the next two quarters.

[Robert Paul Napoli, William Blair & Co. LLC]

Okay. Thank you. And just a follow-up question, as we look forward to 2019 and longer term, what are your thoughts around the organic growth by, I guess, fuel versus non-fuel? And if you wanted to break it down further by segment, but just thoughts on the organic revenue growth. And if non-fuel was growing faster, would that make it difficult to expand the margins, I guess?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. I think if you look at the last couple of years, Bob, we've been kind of high-single digits in fuel and, obviously, better in the non-fuel. And so, in my comments earlier, I said we expect to moderate, call it, into the mid teens in the three non-fuel lines. So, we haven't started our 2019 plans yet, but I would assume some mix like that going forward.

And I think the upsides could be these new add-on ideas that we have. If those get traction, and material traction sooner, we could get more lift. And then second, I think if we come up with some solution again to this SVS business, that would be another upside. So pre-budget, I'd say, high-single digits for fuel, teens for the other three, maybe some acceleration from the new programs, and then SVS is the wildcard.

[Robert Paul Napoli, William Blair & Co. LLC]

Great. Thank you. Appreciate it.

[Operator]

Thank you. The next question is coming from the line of David Togut with Evercore ISI. Please proceed with your question.

[David Mark Togut, Evercore ISI]

Thanks. Good afternoon.

[Eric Richard Dey, FleetCor Technologies, Inc.]

Hey, David.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Hey, David.

[David Mark Togut, Evercore ISI]

Pretty major announcement, Ron, calling out a significant expansion plan for Europe and then Asia. Europe, you've got the beachhead with Shell. But I'm wondering as you look at Continental Europe and Asia, what are the major growth opportunities both organically and then through M&A?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah, David, we're kind of on the same drill, trying to get positions either via partners, or acquisitions, right, versus a greenfield build. I'd say the difference in messaging is we've put not only more energy in the last six to nine months in Asia, but we're seeing better feedback. So, I'm trying to just put in people's minds that we haven't forgotten that part of the world and that something may break our way on that side. So, that's – I'd say the difference is the Asia activity looks, I think, a bit more favorable than it did six or nine months ago.

[David Mark Togut, Evercore ISI]

And is that mostly through M&A opportunity or organic growth?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

It's not organic, so it'd either be a partner deal or an M&A deal.

[David Mark Togut, Evercore ISI]

Got it. And then Visa seems to be making a bigger push in Corporate Payments with the announcement with WEX and I think historically WEX have been principally MasterCard virtual payments, as you had been. I'm just curious, does it make sense for you to bring in Visa just from a negotiating standpoint as you work with both of the networks in virtual payments?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. Actually, a good friend of mine is the CFO of Visa. So, it's a relationship that we have. I would say that we're pretty happy with the MasterCard people, with the relationship, with the deal. So, I'd say never say never. So, we're obviously in conversations with them. But one the same end, pretty happy with MasterCard. I think last, look, we're about half of all of MasterCard's U.S. virtual card business. And I think we're the second largest MasterCard issuer of commercial cards across every product line. So, I think they like us because we're relatively important to them on the commercial side.

[David Mark Togut, Evercore ISI]

Got it. Quick final question on the MasterCard topic, when do you fully lap the MasterCard card conversion from a year ago and is there a point where it could even become a tailwind as you exit the year?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. Hey, it's Ron again. So, I'm actually looking at that slide. So, I'd say that it is still – it was a negative in Q2 that we reported. It'll be a negative in Q3. And I'm looking at a page that said it will turn positive in Q4. So, part of the reason that we're outlooking, call it, plus 8% organic into fuel in Q4 is that that boat anchor is finally making the turn from the minus to the plus column.

[David Mark Togut, Evercore ISI]

Understood. Thank you very much.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Good to talk to you.

[Operator]

Thank you. The next question is coming from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

[Tien-Tsin Huang, JPMorgan Chase & Co.]

Hello, guys. Good afternoon. I want to – some good non-fuel performance, obviously. So, on the Toll front, how much of the business is tied to volume versus subscription? See that Toll transactions were down again, but revenue is 20%-plus again. So, just trying to better model that because we've been getting that question a lot.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah, Tien-Tsin, it's Ron. So again, the majority, not all, but the majority of the model there is tag based. You pay a fixed amount for a tag for a month. And so, what I called out is that our active tags that we bill for grew 5% in Q2 versus the prior Q2. So, that's our best metric for volume. With that said, we do now get, call it, 20% of the revenue base is sensitive to transactions. And to your point, transactions, I think, at the print were down a bit, but the strike, I think I mentioned, had about a 5% negative impact in transaction count.

So, we think trans would have grown, call it, a couple – 2%, 3% in addition to the tag growth, which is really more selling. And then, obviously, picked up incremental revenue from parking and fuel, which obviously is not toll transactions and stuff. So I'd say, call it, half to pick a number out of 20% again that, call it, 5% is tags, a couple was tran, and we get some revenue for that. And then the increment would be incremental fuel spend and incremental parking revenues.

And then the other balance is basically the program we've put in place to get paid a bit more money from the high usage, particularly the trucking clients that use the product 80 times a month and put a lot of spend on the program.

[Tien-Tsin Huang, JPMorgan Chase & Co.]

Yeah. Okay. Thanks for that. So, it's pretty durable given that mix that you're describing. But how about – just to bring it up a higher level into Brazil, has your outlook changed? FX aside – and I know it's hard thing to say in Brazil, but FX aside with what's going on with the election and the macro situation, has your outlook there changed? And what's your appetite to do more there organically or inorganically?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. I mean it's a good question. I guess it's still difficult. I don't have it in front of me, but I think the economy is still zero to plus 1% or plus 1% for the full year. And I think things are a bit frozen, right, with the election in the fall. But I'd say we're still long on it. I've said it a million times that when you step way back, it's a big and early day's payments market for everything that we do. One of our kind of comps is Edenred. Half their profits are in that market and not half of ours are. So, I'd say that we still like it a lot because of the potential, Tien-Tsin, and like others, hope we can get to the other side of this instability.

[Tien-Tsin Huang, JPMorgan Chase & Co.]

Okay. That's great. One last one, sorry to take up a third question here, but SMB room volume you said was up over 30%. The digital booking tool, which you mentioned last quarter, was going to work. Is that just the beginning? Could that actually improve from here? I'm just curious how sustainable that benefit (41:20)...

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. I mean, I think the fascinating – this is another great question. The fascinating part is we've trained those 10,000 small companies for years now how to use the product, which is to call themselves or walk in. And even that group that's been around a long time, one-third of them use the booking tool. Of the brand-new accounts, for example, that signed up in Q1, 70% of all this SMB rooms were booked with the tool. So, the new people that hear it from the get-go use it more. So, the first thing is, the mix alone will increase it sequentially. And then second, I think, as we keep marketing it to, quote, the old customer base, we'll get more lift. So, my guess, as you roll out a year, you'll be at 50% or 60% of all SMB will be booked with that tool.

[Tien-Tsin Huang, JPMorgan Chase & Co.]

All right. That's great. Thanks for the update.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Good to talk to you.

[Operator]

Thank you. The next question is coming from the line of Oscar Turner with SunTrust Robinson Humphrey. Please proceed with your question.

[Oscar Turner, SunTrust Robinson Humphrey, Inc.]

Hey. Good evening, guys.

[Eric Richard Dey, FleetCor Technologies, Inc.]

Hey, Oscar.

[Oscar Turner, SunTrust Robinson Humphrey, Inc.]

My first question is on beyond fuel. When do you think that initiative can be incremental to the segment's revenue growth? And then, can you give any color on adoption, like what percent of fuel card customers are eligible to use it and how many of them have used it to date?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah, Oscar, it's Ron. I'd say I wish I could. I'd say that, again, it's still very early days. So, if you think about it, we've got – right, 45% of our company is fuel cards and, call it, 10 businesses, right, around the world. And so, we're introducing different flavors, different versions of this beyond fuel in different places. So, we have different things happening here in our U.S. local business than we have in our U.S. trucking business than we have in our UK business. So, the first headline is the approach is for beyond fuel are a bit different depending on the specific line of business.

But I'd say, what the good news is – which I was trying to call out, is the early reactions are encouraging. So, customers are taking up this AP companion card. We've got three or four teams still selling the BuilderPro construction card. So, the problem is we're not long enough into the thing to turn it into a certain model yet. I'd say, as we get closer to the end of the year and we build our 2019 plans, ask me again, and we should have a clearer thing. But that would be – back to Bob's question earlier, I think that's the delta for people that want to bet. That's the vector for us. The pace of that could drive another point, or two, or three of faster growth if that stuff could materialize faster.

[Oscar Turner, SunTrust Robinson Humphrey, Inc.]

Okay. Thanks for the color. And second is just on the long-term profit margin outlook. You guys have outlined a number of growth initiatives that you're executing on, some of which required building out sales force or acceptance networks. So, how should we think about the ability to maintain your current profit margin levels, even as you reinvest towards these growth initiatives?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. We like our chances of those inching up. I think you know us well enough. We're not in the charity press release business. We're in the profitable growth business. So we try to, obviously, onboard business that we can make money. And so, I'd say the things that would cause us to have higher margins are; A, just the operating leverage. We still have 30%, 40% of the company's cost structures relatively fixed. So, we have that going for us. And then B, these add-on things that you brought up earlier carry better margins, because many of them are sold back to the same clients. And so, obviously, the selling costs and servicing costs of an add-on is, by its nature, lower and thus the add-on margins are higher.

So, I'd say those two things bode well for higher margins. And then, I think just pace of growth and investment goes the other way, right, if we decide to step up sales investment or even more IT or innovation investment. So, I'd say, if you net those two, our forecast over the next few years would be to keep ticking it up positive a bit.

[Oscar Turner, SunTrust Robinson Humphrey, Inc.]

Okay. Thank you.

[Operator]

Our next question is coming from the line of Ashish Sabadra with Deutsche Bank. Please proceed with your question.

[Ashish Sabadra, Deutsche Bank Securities, Inc.]

Thanks. So pretty solid growth in the fuel card business from 1% to 5% and you're talking about 8% growth for the fourth quarter. If you could just – obviously, the headwinds are coming off, but can you also talk about the sales traction that you've seen here as you've revamped sales effort on this – on the fuel card, specifically? And then, also in the same light, if you can talk about the Casey win, how should we think about it? What really drove that win? Thanks.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. Ashish, on the first part of the question, I'd say our confidence in the acceleration is mostly what you said, which is, okay, the print for this quarter was 5% and we're outlooking 8%. I think David asked a bit ago, asked me about GFN, and I said it was a negative impact in Q2 and our plans are for that to turn the other way. So, a lot of the acceleration from 5% to 8% is literally just moving that boat anchor aside. With that said, I hope you didn't miss that we sold more fuel card business globally this past quarter than ever – ever in the history of the company, a record level of it. And so, assuming our retention or attrition stays kind of where it is, retention of 90%, obviously, the adding of incremental fuel sales will help lift that thing about 8%. So to us, it's get the boat anchor aside so the growth is clean; b, pick up the sales volume, which we did again in the quarter; and then third, Oscar's comment about the beyond fuel, get the beyond fuel to take. Those are the three plans, if you will, to get the thing back to an attractive number.

On Casey, your part two question, I think you asked – timing or size, or both?

[Ashish Sabadra, Deutsche Bank Securities, Inc.]

Both, and also what drove the – like what drove that win? What was the criteria that Casey was looking for in your product that drove that win?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

I got you. So first on the why us, I think all of these partner/private label things have a similar screen. They have a, hey, can you do it? Can you operate the thing? So, I think there's a few of us that have the systems and the people to actually be able to do it and not goof it up. So they would look at SLAs of our other partners, reference us that we can do the work. Then two is volume or growth that they believe that we can sell that we have selling systems that can work. And then, three is, obviously, the price. And so, I'd say those are the three main criteria. And so, I think us versus others that did probably checked the box on the first one. Obviously, other people in the space, WEX or Citibank can do cards. And then, I think that the view of our ability to grow the volume and whatever our price proposal was would be the two things that caused them to pick us.

In terms of timing, we're looking at that conversion starting in Q4 and running into the beginning of next year. And although we don't give individual client revenues, I'd tell you it's a single-digit millions annualized contract.

[Ashish Sabadra, Deutsche Bank Securities, Inc.]

Thank you very much. Thanks for the color.

[Operator]

Thank you. The next question is coming from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

[Sanjay Sakhrani, Keefe, Bruyette & Woods, Inc.]

Thanks. A question on the M&A and new partnership front and whether or not you guys are getting closer to anything on those fronts?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yes. Ron, again. So on the M&A front, I think I mentioned on the last call, we actually were on the five yard line with something that we decided a no on. So, something that was closed, we kind of kicked out. But I'm looking at the list in front of me. I'd say that we've got three or four deals that are active, what I use the term they're in the works now. Looking at them, they're, I'll call them, about $200 million to $400 million-ish in size and then there is one larger deal. So I'd say that nothing we're going to announce in the next 30 days, but things that we're amid and getting layer on right now.

On the partner front, probably the same. I've got that page in front of me. We've got a couple things here in the U.S. We've got something in Europe. We've even got something in Brazil. But again, I've been wrong so many times forecasting the timing of those. I'd say, it appears again that we've got three or four partners that have an interest in maybe doing something, but it's not late enough for me to give you guys a steer that it will be this year.

[Sanjay Sakhrani, Keefe, Bruyette & Woods, Inc.]

Got it. And just to follow-up on, Ron, your response to Tien-Tsin's question on STP. When we look at how much of the Brazilian market has your tags – I guess, Brazilian vehicles have your tag, what's the penetration rate of those tags into that market and sort of what's the growth opportunity there?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

So, there's a couple of ways to look at it. We look at the thing in terms of total toll spend, so what's the total take from every toll booth in Brazil annually in real and then how much do we process or collect. And I think – I don't have that number in front of me, but I think it's around 60% of all the toll money that's collected in a year is collected by us. So, I'd say that we're moving down the curve. We sell about 1 million new tags per year. Again, we've got about 5 million active holders here in Q2. We sell about 1 million new ones per year. So, I'd say that we're moving down the curve of lighter users. Obviously, anyone on the toll on the highway that are going 100 times a month already have our tag. And so, we're more likely to get someone that's going five times or three times next.

So, I'd say the big idea, which I don't know if I've communicated it well enough – but the big, big idea there is to take that technology and the relationships we have with fueling and parking, and go to the other 35 million vehicles that don't go on the highway, that just go around the cities and like park in the garages and go to Shell stations and Petrobras stations. So when we look at that, and the early returns on it are people like not stopping and paying for parking when they go to a mall there and yet the company's only offer that service so far to people that are toll guys that go on the highway. So when we bought the company, our idea was we're not going to be a toll company. We're going to be a toll technology or payment company. And so, the message you guys ought to cue on is, how fast can we start to add users that are not toll users that want to use fuel and parking, in particular.

And I'm telling you if that works, it's 5 times to 10 times the market potential of the thing that they've built. And again, we built a massive distribution system, almost 2,000 people in the field selling. We've turned on their digital. We've got third-party retail now. And so, we, FLEETCOR have relationships with the three biggest gas station, fueling retailers in the country. And so, we bring a fair amount to chasing this thing down. So, that's the growth. That's the growth.

[Sanjay Sakhrani, Keefe, Bruyette & Woods, Inc.]

That makes sense. Thank you.

[Operator]

Thank you. The next question is coming from the line of Darrin Peller of Wolfe Research. Please proceed with your question.

[Darrin Peller, Wolfe Research LLC]

Thanks, guys. Just first on the second quarter, if you can break down again the 5% fuel growth that (54:55) have been excluding the GFN issue and Chevron in the quarter (54:58). And just to be clear, wasn't there some element of pent-up demand flowing through now or shouldn't there be from the MasterCard product being kind of held off during this process that, I would think, would show up in full (55:10) swing in Q3? Just you were saying now it will – the growth rate would be reaccelerate up to 8% plus (55:16) or I guess should we expect 8% plus in the third quarter? Thanks guys.

[Eric Richard Dey, FleetCor Technologies, Inc.]

Yeah. Hey, Darrin. Yeah, if we exclude the impact of the GFN conversion issue and Chevron, the fuel card growth category would have grown around 8% organically. So again, it's in line with the guidance that we previously gave last quarter that growth rates are going to start accelerating in the space. And again, we're going to start exiting at a – we're going to clear the GFN issue, particularly as we get to Q4. We'll have a cleaner kind of 8% or so growth rate in that quarter as we exit the year.

[Darrin Peller, Wolfe Research LLC]

Okay.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah, Darrin, hey, it's Ron on the part two question of, hey, you got a bunch of – you closed the retail, so you've got a bunch of hot beard lines (56:01) of people at the door coming in. I'd say, again, that toe stubbing we did with GFN not only impacted the customers that were on GFN, but hurt the productivity big time of our sales force. We turned them into service reps for – oh, my God, I don't know – four or five months – yeah, four to six months, trying to help clients they had sold where the thing was broken and stopped. And so, it's been a way longer recovery of getting that group of people back, A. And then B, because we thought the GFN platform was going to be the platform, a number of new products we had built only ran on that platform. So, I made the decision not to go forward with that and put those new products on that platform, but to put them back on the old platform we had. So, that took us another three or four months to kind of reengineer that, so adding up salespeople, selling new things that they didn't have confidence in.

And so, it's not really a pent-up demand. I really view it as a recovery that finally we opened a brand new telesales center in Phoenix this past quarter, mostly to get away from that pain that the people – a couple hundred people here lived through. I wanted a clean brands bank, and new group of people that hadn't been through it. So, I'd say that the way you should think about it is every quarter from now we need to be building sales volume for that MasterCard product and getting farther away from that problem a year ago.

[Darrin Peller, Wolfe Research LLC]

All right. Thanks. Just a quick follow-up, and then I'll leave it at that. Corporate Payments still an area that we're obviously excited about. The sales pipeline continues to be so strong there. I know you have tougher comps on pricing, but I guess I'm just wondering (57:55) why that business wouldn't go back to even 20%, even if it takes a quick breather in the mid-teens. Am I thinking about this fair?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. I think you are, and I think we've been with you since we started talking about this that we're a huge fans of that category, because of the size of it. I think the biggest issue for us, Darrin, was the structure of the thing. So when we bought that business initially, whatever size it was, it had two pretty big parts of its revenue. It had healthcare, which was, I don't know, a third to 40% of the business when we bought it; and it had a fair amount of partners and resellers in it, call it another quarter or third. So, 50% or more of the business was that. Well, those two segments keep going the wrong way, even three years later, the healthcare business continues to decline even in Q2, so it sits inside of that 20%-plus. Still healthcare was minus, although it's smaller. And second, we keep getting re-priced on renewals of the big reseller partners, so even though the volume goes up, we get less money.

So, what I'd say to you is the non-healthcare and non-partner business is probably growing 35%, just to pick a number. And so, what I'd say is we are – where, obviously, the guy running at me were taking the business away from these two things that I'm saying that were not my favorites to verticals that we like, like construction, media and just general AP. And so, once we kind of ring through the other side of this, the non-healthcare and non-reseller piece will be smaller part and you'll see, to your point, a 20% plus business going forward. How long it's going to take us to get that thing completely ironed out? It'll be sometime in the next year would be my guess. So, it's effectively remaking that business in flight is what we're doing.

[Darrin Peller, Wolfe Research LLC]

Make sense. Thanks, Ron.

[Operator]

Thank you. The next question is coming from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

[James Schneider, Goldman Sachs & Co. LLC]

Good afternoon. Thanks for taking my question. I was wondering if you can maybe kind of address the same-store sales trends you've seen. I think you talked about up 2% in the quarter. Can you maybe talk about where do you think that's kind of going, up, down or sideways, as we go forward and maybe any puts and takes in terms of industries within that?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah, Jim, it's Ron again. I'd say, like we always say, we're not super-smart in terms of the forecasting of same-store and GDP and stuff, but we have seen, certainly in the U.S. now, at least three or four quarters in a row that have been in the plus column. And this Q2 that just finished, we had super health in Lodging, in Corporate Pay space and in Russia, those three were way up in terms of growth of the existing customer base. So, again, in our plans and the guidance we gave you, we're thinking the things kind of where it's been, kind of 1% to 2%, I think, is what Eric and I modeled for the rest of the year. But again, it's not a metric that's really super easy to forecast.

[James Schneider, Goldman Sachs & Co. LLC]

Completely understand, but it's helpful color. Thanks. And then maybe as a follow-up. Can you maybe just talk about kind of with Cambridge almost a year in the rearview mirror here, your overall approach to the accounts payable market, whether your – kind of how satisfied have you been with that acquisition so far? And then, going forward, from an M&A perspective, whether you think you might want to actually add more assets to bolster that AP portfolio either in terms of the size of business or anything else?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. That's a really good question. I know lots of people, maybe even on this call, for some reason don't love the international payments, FX business. Maybe there's some players out there that haven't done as well, but we're delighted. I told the CEO earlier this week coming up on a year that we are so happy we bought his company, their company. It got off to a bit of a slow start, because I had them working on really too many things, but they got through that. They've grown mid-teens plus the last couple of quarters, are outlooking good growth. The sales are way, way up, 25%, 30% up over the prior year. So, I'd say at the highest level, we are really happy that we're in the space.

Number two, we're starting to see some synergies from the cross-selling to the tune of $4 million or $5 million of new sales we're expecting as we exit this year from our Comdata people, selling the Cambridge international pay people. So, that makes me, us feel good about the relatedness of the businesses that the Cambridge clients, obviously, pay domestic AP too, along with international AP. And so, we like the fact that we're in both of those.

And then last thing I'd say to you is, this whole AP, automating and digitizing AP, we think – I think just it is a massive opportunity. And I worked at ADP for almost 10 years, and half expense structure on the planet is people and the other half is vendors. And so, building the, quote, ADP as AP (1:03:38) is a theme we have in the company that we probably will take bigger positions in the space over the coming years. We like it a lot.

[James Schneider, Goldman Sachs & Co. LLC]

Super helpful. Thank you, Ron.

[Operator]

Thank you. Our next question is coming from the line of Peter Christiansen with Citibank. Please proceed with your question.

[Peter Christiansen, Citigroup Global Markets, Inc.]

Thank you. Thanks for fitting me in. Just two quick ones. First, your competitor this morning was shipping – well, at least playing with our guidance a little bit as it relates to the Chevron transition, looks like timing might be pushed off a little bit there. Can you just remind us how you're factoring that into the outlook?

[Eric Richard Dey, FleetCor Technologies, Inc.]

Yeah. Hey, Pete. This is Eric. Yeah, we're now thinking we'll probably have that portfolio for the remainder of 2018. So, we've kind of built that in. We originally were forecasting to have it kind of mostly through the third quarter. We'll, probably, now have it mostly through the fourth quarter. Then we'll transition away from it as we get into next year.

[Peter Christiansen, Citigroup Global Markets, Inc.]

That's helpful. And then the Lodging business is doing fantastic. And just any commentary on – we're seeing more and more articles on the trucker shortage here in the U.S. It seems to not be impacting the Lodging business at all, but any general comments on if you're seeing any improvements there either on the fuel card side or on the Lodging side?

[Eric Richard Dey, FleetCor Technologies, Inc.]

Well, on the Lodging side, I mean, clearly, we're seeing increases in volume all over the portfolio. As we've said early on, we're focusing more down market, where there are smaller fleets, in area where that business has traditionally not sold in. So, we've been extremely successful. And it's an area that's very underpenetrated in the space. So, we've seen a lot of success and we think we're going to continue to see a lot of success.

And now, adding the digital tool, booking tool now has even more incremental rooms to the business as truckers are starting to use that tool a lot to book their new reservations. And it's business that we're gaining that we used to kind of lose a little bit of in the past. So, we're very, very bullish on the continued success of that business going forward.

[Peter Christiansen, Citigroup Global Markets, Inc.]

Great. Thank you for fitting me in.

[Operator]

Thank you. Our next question is coming from the line of Matthew O'Neill with Autonomous Research. Please proceed with your question.

[Matthew O'Neill, Autonomous Research]

Yeah. Hi, thanks, guys. Ron, I was hoping I could follow-up on a comment you made in your prepared remarks around sales channels and working with new partners, like merchant acquirers. I was just curious kind of what the opportunity is there? Who and how are you working together? And any other details you could provide on that. Thanks.

[Ronald F. Clarke, FleetCor Technologies, Inc.]

Yeah. That's a really good question. I think – I'm friends with Jeff Sloan of Global and Frank. So I know both of those guys and their businesses. So, I think the new news for us is, call it, over the last five or 10 years those companies have signed up way more kind of service businesses, think of a plumbing or a construction person going out to a house and getting paid with a card now instead of billing. And they're not super-important accounts to an acquirer, because their volumes are relatively low, but they could be super-important accounts to us, because they buy more fuel than they run credit card transactions.

So, I'd say the opportunity that we're exploring is kind of leveraging their channel and their existing client base that's in the service-centric kinds of businesses to take some of our card products. So, our products fit some of their customers. And both of those companies are quite used to partner work and kind of working, obviously, for example, with banks and ISOs, and bars and stuff. And so, I think it's right in their wheelhouse to maybe work with someone like us. So, that's – the good idea is to use their relationships and customers and channels, and maybe put some of our product line in.

[Matthew O'Neill, Autonomous Research]

Got it. Thank you very much. And would they think about working, the relationship in the opposite direction as well, potentially, or is that premature?

[Ronald F. Clarke, FleetCor Technologies, Inc.]

They would. They both are smart guys and they had some reciprocal ideas of some ways that we could help them. I mean, on that point, just this idea we talked – I guess, Peter said in the last call about winning and people talk a lot about nameplate and stuff. Just to remind people, we sold 30,000 new business accounts in Q2, 30,000 new businesses joined our portfolio. And so, for us, this word winning is not a name of a company. It'd be a long list for us to name who we're winning, but I want to make sure people leave the call that in our view that's winning, selling more new business than you ever have, and selling diversified business that you can make a buck on is our idea. So, just an FYI.

[Matthew O'Neill, Autonomous Research]

Great. Thank you very much.

[Operator]

Thank you. It appears we have no additional questions at this time. And this does conclude today's teleconference. Ladies and gentlemen, we thank you for your participation and you may disconnect your lines at this time.