Global Payments Inc

NYSE:GPN

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Global Payments 2019 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will open the lines for your questions and answers. [Operator Instructions] And as a reminder, today's conference will be recorded.

At this time, I would like to turn the call over to your host, Vice President, Investor Relations, Winnie Smith. Please go ahead.

[Winnie Smith, VP, IR]

Good morning, and welcome to Global Payments' second quarter 2019 conference call. Before we begin, I'd like to remind you that some of the comments made by management during today's conference call contain forward-looking statements about expected operating and financial results and the anticipated merger with TSYS.

Including the strategic rationale and financial benefits of the transaction, among other matters. Forward-looking statements are subject to risks and uncertainties discussed in our SEC filings, including our most recent 10-K and any subsequent filing. These risks and uncertainties could cause actual results to differ materially. We caution you not to place undue reliance on these statements.

Forward-looking statements during this call speak only as of the date of this call, and we undertake no obligation to update them.

Some of the comments made refer to non-GAAP financial measures such as adjusted net revenue, adjusted net revenue plus network fees, adjusted operating margin and adjusted earnings per share, which we believe are more reflective of our ongoing performance.

For a full reconciliation of these and other non-GAAP financial measures to the most comparable GAAP measure in accordance with SEC regulations, please see our press release furnished as an exhibit to our Form 8-K filed this morning and our trended financial highlights, both of which are available in the Investor Relations area of our website at www.globalpaymentsinc.com.

Please note that today's presentation is neither an offer itself, the solicitation of an offer to buy securities or solicitation of a property vote. The information discussed today is qualified in its entirety by the registration statement on Format 4 and joint proxy statement, as well as any amendments to those documents that Global Payments and -- have filed or may file with the SEC.

Joining me on the call are Jeff Sloan, CEO; and Cameron Bready, Senior Executive Vice President and CFO.

Now, I'll turn the call over to Jeff.

[Jeffrey Sloan, CEO]

Thanks, Winnie. We are delighted to have delivered double-digit organic growth once again this quarter, driven by strength in our technology-enabled businesses. This performance coupled with of outstanding execution across our markets also resulted in adjusted earnings per share growth of 17% and adjusted operating margin expansion of 100 basis points.

This quarter's adjusted net revenue plus network fees growth also marked and acceleration from a terrific first quarter. And we produce these results as our team simultaneously advance our transformational merger with TSYS.

These outstanding accomplishments serve as further proof points that the successful execution of our strategic objectives continues to deliver a consistent industry-leading financial outcome.

We are focused on providing innovative payment solutions to our customers across our distinctive distribution channels and diversified geographic footprint. And our partnership with TSYS will significantly enhance the scale and scope of our technology enabled software driven ecosystem globally.

I will provide an update on the significant progress we have made with TSYS in a moment, but first, I would like to cover a few of the key milestones we achieved across the three pillars of our strategy this quarter.

Starting with our integrated and vertical markets, businesses, we yet again delivered sustained a strong organic growth. Our partnered software business performed well as our new ISP partners are exceeding our expectations and contributed to the mid to high teens top-line growth we delivered in this channel. And the competitive differentiation of our integrated payments technologies continues to drive new wins.

Notably, we signed a new agreement with Togetherworks, which provides a management platform for a group of 22 innovative SaaS companies with solutions that span multiple vertical markets, including fundraising, recreation, and fraternal organizations. Togetherworks annual payments buying opportunity is currently $4 billion and growing, and we look forward to working with our new partners.

As for our own software assets, we also achieve strong results across the portfolio, as we leverage our distribution and payments capabilities to scale are leading SaaS solutions in their respective vertical markets.

Starting with active network, booking trends for its core products remain consistent, continuing the solid trends we have recently seen in the business. We were pleased to sign our largest ever international camp and class manager relationship this quarter.

AdvancedMD also had another great result, including its best quarter to date for referrals to OpenEdge is our streamline interface and leading product suite is driving strong adoption of our payment solution by physician practices.

Turning to SICOM. We successfully deployed our kiosk solution to over 200 Tim Hortons' locations in Canada over the last few months and will roll out to an additional 500 locations by year-end.

We have also started to deploy our kiosks across Burger King franchises in the United States. Our kiosk solution allows restaurants to reduce labor costs, improve order accuracy, and increase sales through marketing and up sell opportunities.

Moving to our e-commerce and omnichannel businesses, we are making significant progress with our new Unified Commerce Platform or UCP, which provides a single omnichannel payment solution worldwide through one API.

Specifically, we made our UCP API available for testing globally at the end of the first quarter. And we just released our new chargeback Management API this month. We are now live with full omnichannel payments across our new infrastructure in Canada and Asia Pacific.

We remain on track to complete the rollout of the new platform to all of our global markets by the end of the year, uniquely positioning Global Payments to seamlessly combined both virtual and physical worlds to serve complex merchant needs.

Several of our most sophisticated multinational clients are streamlined their payment operations by integrating to our new platform, and it's already driving new marquee wins.

Specifically, in conjunction with our partner Caixa, we're expanding our relationship

with Spanish clothing retailer Desigual across four continents for both in-store and e-commerce payments, Desigual will leverage our new platform to allow their customers to seamlessly shop across channels globally.

Additionally, we are delighted to have recently expanded our relationship with a premier French luxury retailer into more than two dozen markets worldwide. This customer will simply leverage our platform to meet evolving consumer demand and to simplify and centralize their payment operations.

We're also pleased to have recently reached an agreement to expand our omnichannel partnership with one of Canada's largest retailers into a new online marketplace offering.

Lastly, we've established a new e-commerce win in Asia, with Star Cruises. We have a long-standing relationship across Hong Kong, Singapore, and Malaysia. And we are excited to expand our partnership beyond the physical point of sale to provide a full omnichannel solution.

Finally, we continue to deliver outstanding results in our faster growth markets. Regarding our newest geographies, we are making excellent progress with HSBC in Mexico, since our launch in January 2019. Our leadership team is in place, as is our new facility in Mexico City. And we are continuing to ramp our sales and support organizations.

We are already seeing growth accelerated double digits organically in this market and remain enthusiastic regarding the long-term opportunities for this business and across Latin America as we bring leading technologies into these new markets.

We also announced the expansion of our joint venture with the Erste Bank into its home country of Austria last quarter. And we are now working to scale our business, to capitalize on the favorable secular trends in this market, by leveraging our distinctive partnership, exactly as we said we would do.

HSBC, Erste and Inbursa which recently agreed to join Caixa and us as a strategic partner in Brazil, are some of the largest most complex and sophisticated financial institutions or FIs globally.

We are proud of the company that we keep, and we could not be more pleased to partner with these leading institutions, highlighting the differentiation and durability and extensibility of our position is a partner of choice to leading multinational FIs.

Turning to our biggest strategic milestone for the quarter, we were delighted to announce our agreement at the end of May, to combined with TSYS, in a landmark transaction for our industry. This partnership creates the preeminent pure play payments technology company at scale, focused on SMBs and leading FIs in the most attractive markets globally.

The merger accelerates our technology enabled software driven payment strategies and positions our merchant business as the leading provider of integrated payments in e-commerce and omni channel solutions globally.

Further, the addition our dishware solutions dovetails with our strategy, providing mission critical software and processing services for card issuing customers worldwide, increasingly in the cloud, and on a SaaS basis.

This business is ranked number one in market share in the United States, Canada, the United Kingdom, Ireland and China, and number two across Western Europe. No peer has a business at that scale across those markets, which will bear substantially on our revenue synergies.

The combination will also provide us exposure to additional faster growth geographies and enhances our scale and markets overseas. We're both companies operate today. Combined, we will have a physical presence in nearly 40 countries globally and will do business in over 100.

The highly complementary nature of these leading payments focus businesses provides for significant revenue enhancement opportunities. First, inside the United States, we will meaningfully enhance the value proposition for TSYS customer base of more than 800,000 merchant locations across over 50 vertical markets with our software solutions, analytics capabilities and unified commerce platform.

We will reciprocate by cross-selling TSYS products like Vital POS for retail into Global Payments’ merchant base. TSYS will also add more than 500 sales professionals and will more than double our domestic financial institution base of referral partners. In some, we will have the preeminent U.S. merchant business focus predominantly on SMEs.

Second, outside the United States, the expanded breadth of our combined 1,300 FI Partnerships also provides large untapped opportunities for new issuer and merchant referral relationships.

TSYS more than doubles our existing FI base globally. And we have already had FI's expressed interest in our ability to cross-sell issuing into acquiring partnerships, as well as the reverse. And just the two months since we announced the merger.

It is worth noting that Global Payments is fully operational today in 31 markets outside the United States, something our legacy peers with recent corporate exits last now and for the foreseeable future.

In that context, it will be quite some time before purchasers of those businesses will be able to effectively cross-sell, issuing and acquiring services. As we also mentioned, at the time of our transaction announcement. We expect, our merger to open further avenues for inorganic growth internationally, given our unique positioning.

Third, we believe the combination of our issuing and acquiring businesses globally will enable us to emulate the benefits of debit network ownership technologically, without the need to actually own a debit network in any geography generating superior return opportunities.

We will therefore be uniquely positioned to develop new products at scale on a worldwide basis, including multinational domestic and cross border onus routing, enhance loyalty and analytic schemes, more effective merchant, initially joint sales strategies and Strong Customer Authentication or SCA approvals internally.

On that last point, we expect our e-commerce businesses to benefit from higher authorization rates via our own proprietary SCA that will be uniquely available to Global Payments.

Fourth, and finally, we expect TSYS' consumer solutions business to provide us with new B2B, B2C and P2P capabilities and opportunities in new geographies. As just one used case, we believe we can bring net spend into new markets based on Global Payments existing acquiring partnerships outside the United States. And of course, here in the U.S., we expect NetSpend pay for products to help substantially expand the target addressable markets for Heartland's Payroll Solutions.

As to the merger itself, we have made great progress and are now tracking ahead of our previously announced plans and expect to close the transaction as early as the beginning of the fourth quarter.

We also successfully closed in our new credit agreement on July 9th, an important milestone in establishing the new capital structure for our combined company. Our integration planning is underway and based on preliminary work, we have even more confidence in the expected synergies and increasing targets that we outlined in May.

We could not be more excited about the future as you bring together two premier payments companies with strong businesses, management teams and cultures that will generate significant opportunities and long-term value for our employees, customers, partners and shareholders.

Now, let's turn the call over to Cameron.

[Cameron Bready, Senior EVP and CFO]

Thanks, Jeff and good morning, everyone.

We are very pleased to report another quarter of exceptional financial results driven by our differentiated growth strategy and ongoing relentless focus on execution.

Total company adjusted net revenue plus network fees for the second quarter was $1.114 billion, reflecting growth of 13% versus the prior year period.

On a constant currency basis, adjusted net revenue plus network fees grew over 15%. Once again driven by low-double-digit normalized organic growth. Adjusted operating margin expanded 100 basis points to 32.4% and adjusted earnings per share increased 17% to $1.51. On a constant currency basis, adjusted earnings per share again grew over 20% this quarter.

We're proud of these results remain encouraged by the momentum we have seen in the business throughout the first half of 2019. We're also pleased with the milestones we've achieved in parallel on our merger with TSYS, which I will cover in a moment after highlighting the performance our team delivered globally.

Starting with North America. Adjusted net revenue plus network fees was $840 million, reflecting growth of 17% over 2018. This included an approximately 50 basis point headwind from weakness in the Canadian dollar.

Adjusted operating margin in North America expanded 160 basis points to 34%, driven by growth in our technology enabled businesses and continued strong execution across the segment.

Our U.S. direct distribution business once again delivered low double-digit normalized organic growth in the quarter led by strength in our integrated and vertical markets businesses which grew in the low double-digits organically. We continue to see high single-digit organic growth in our U.S. relationship-led channel while our wholesale channel declined mid-teens consistent with our expectations.

Our recent acquisitions, AdvancedMD and SICOM contributed approximately $60 million in the quarter, our Canadian business grew mid-single digits in local currency, which was largely offset by headwinds from the Canadian dollar.

Moving to Europe reported adjusted net revenue plus network fees grew 9% in local currency, or 3% on a reported basis. As foreign currency exchange rates remain a significant headwind in the quarter.

Local currency growth was again driven by strength in our businesses in Spain and central Europe, each of which grew well into the teens. We did see a slowdown in organic growth in UK this quarter at the macro environment further deteriorated with the April Brexit deadline passing without resolution. The declining consumer spending in the UK accelerated in Q2 versus Q1, and we expect this weakness to persist.

Our E-com and omni solutions business was another bright spot in Europe again growing mid-teens this quarter as our unique value proposition, including the new elements of our UCP continues to resonate with customers and drive new wins, such as those highlighted by Jeff earlier.

Adjusted operating margin in Europe expanded 120 basis points to 48.6%, driven by consistent execution and the benefits of increased scale in our central European business.

Turning to Asia Pacific. Reported adjusted net revenue plus network fees grew 7%, or approximately 11% on a constant currency basis. While we saw strong trends across most of the region consistent with Q1, local currency growth was negatively impacted by the recent protest in Hong Kong, which is our largest market in Asia. We estimate these protests negatively impacted growth by approximately 200 basis points this quarter.

These headwinds and those from the foreign currency exchange rates as well as our ongoing initiatives to reinvest in the business. Adjusted operating margin in Asia expanded 160 basis points to 33.1% due to continued outstanding execution of our team in the region.

As of the end of the quarter, our leverage was below 3.2 times. During the quarter, we invested approximately $78 million in capital expenditures and returned approximately $72 million to shareholders through share repurchase programs. Prior depositing our repurchase program ahead of the announced merger with TSYS.

In connection with our plan combination with TSYS, we successfully closed a new unsecured investment grade credit agreement earlier this month, consisting of a $2 billion term loan and a $3 billion revolving credit facility. This new credit agreement will become effective at the closing of the merger and we will replace Global Payments' existing secured credit facilities and TSYS' unsecured revolving credit facility.

Further, the new facilities will also reduce our interest rate, double our revolving credit capacity and extend our maturities. We are delighted with the execution of the new agreement, which create substantial financial flexibility for the combined organization.

The terms achieve highlight the competence of our bank partners have in the new organization and position us well to continue to pursue our capital allocation strategy going forward.

Moving to our outlook, the momentum in our business allowed us to exceed our expectations in the first half of 2019, positions us well to achieve our financial objectives for the full year. We are however facing incremental pressure from foreign currency and now expect FX to be a more meaningful headwind in the back half of the year. That said, we expect the strong underlying trends we are seeing in the business to offset this impact.

To that end, we continue to expect adjusted net revenue plus network fees to range from $4.4 billion to $4.49 billion, reflecting growth of 12% to 13%, over 2018.

This outlook assumes foreign currency headwinds of approximately 100 basis points in the second half of 2019, which equates to an incremental headwind of roughly 50 basis points for the full year relative to the guidance we provided in May.

In addition, we expect the recent process in Hong Kong to again be a moderate headwind to growth in Asia in Q3, and that the macroeconomic environment in the UK will continue to be weak for the balance of the year.

Notwithstanding these headwinds, we are increasing our outlook for both margin expansion and adjusted earnings per share. Adjusted operating margin is now expected to expand by up to 90 basis points. And we expect adjusted earnings per share in a range of $6 to $6.15, reflecting growth of 16% to 18%, over 2018.

Please note, our outlook does not include the impact of the TSYS merger that we expect to close as early as the beginning of the fourth quarter.

We could not be more excited about the opportunities ahead. Together with TSYS, we will focus on delivering distinctive and differentiated payment solutions to customers in the most attractive markets globally.

We will leverage our competitive advantages and global leadership position to drive industry leading top line growth, margin expansion and adjusted earnings per share growth. The future is indeed very bright.

With that, I'll turn the call back over to Jeff.

[Jeffrey Sloan, CEO]

Thanks, Cameron.

We are delighted with our team's accomplishments in the quarter and the first half of 2019. And our outlook reflects the strength and resiliency of our business model. We were at the forefront of the evolution of our industry, having made significant investments in cutting edge technologies and defensible and distinct distribution.

Our transformation over the last six years has driven best in class results not only relative to our legacy peers, but also compared to the card networks, e-commerce providers and other high-tech software and SaaS companies.

This outstanding performance is starting to be recognized. And we take great pride in noting that Global Payments was recently highlighted as one of the 10 best performing stocks in the S&P 500 over the last five years. And we were the only financial technology company to be so acknowledged. But we were very proud of our past, we are similarly delighted with our future potential.

Our merger with TSYS will accelerate that ongoing evolution. And we are eager to finalize our partnership in the near-term.

Together, we will continue to invest in purely payments innovation and deepen our competitive mode across each element of our strategy. We have the very best employees, providing the very best technologies and experiences to our customers in the very best markets globally. We are fortunate to be in the position we are in today. This is truly an exciting time to be a part of the new Global Payments. Winnie?

[Winnie Smith, VP, IR]

Before we begin our question-and-answer session, I'd like to ask everyone to limit their questions to one with one follow-up to accommodate everyone in the queue. Thank you. Operator, we will now go to questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Andrew Jeffrey from SunTrust. Your question, please.

[Andrew Jeffrey, SunTrust]

Good morning. Appreciate you taking the question. Jeff, I'm kind of intrigued by the comments you made about Togetherworks and your partnership there. I wonder if you could expand a little bit on that. And then generally, Global Pay fact strategy and positioning in the U.S.?

[Jeffrey Sloan, CEO]

Sure Andrew, thank you. I'll start, I'm sure Cameron will add as well. So, I would step back and say Togetherworks is yet another example of a recent win in our integrated and vertical markets businesses, and particularly in our OpenEdge business.

So, as we said in our prepared remarks, another mid to high-teens quarter, OpenEdge is probably gone three quarters in a row, whatever is with sustained and accelerate growth. And Togetherworks is just the latest example of that.

Now more specifically on Togetherworks, I think the nice thing about that business is really we and they think very similarly about where the world is going. That is a cloud-based SaaS company. That is involved in aggregation of smaller payments businesses, I listed some of them and then prepared remarks in the interest that providing more value and volume-based scale economics to those are related businesses.

Those are areas that touch on things that we think we're already good at. Examples include universities, education stuff, Andrew, that we have a significant, we have a significant role in. And we're delighted yet another smart, sophisticated buyer chose us as their provider of payment services going for.

I noted in our prepared remarks that there is about $4 billion of volume at Togetherworks today growing at a good rate. And we're just getting going, which makes us feel really good about the trajectory going forward. It reminds me a little bit of our calls in February and May, where we talked about Tower Technologies and some of the other folks.

On your second question, regarding payment facilitation. Prior to TSYS, and I'll come back to post-TSYS in a second. But certainly prior to TSYS, I think we already have one of the largest payment facilitation businesses in the world.

As you know, Andrew, for many, many years, going back to the HSBC UK days, PayPal has been a customer of ours, in most of the markets, Europe and Asia Pacific, in particular, around the world for many years. In fact, I think in October, November, Cameron, we announced that we renew that relationship for another period of years with PayPal.

So, outside the United States, I think we have a terrific payment facilitation business. I also noted in my prepared remarks that we just signed up a marquee partner in Canada, for more marketplace activities through our unified commerce product offering, which is coming in the immediate term.

So, I think, in most markets, we've got a great payment facilitation business, but we're very excited about in conjunction with TSYS is the ability to extend that more directly into the United States market or TSYS through pro pay as a very good facilitation business. And the ability to get access to some of their disbursement related technologies, think of things like Uber and Lyft and that kind of thing. TSYS for example has Mary Kay, in the United States market.

So, we really view payment facilitation. Andrew is something we've been in for a long time and are very good at. But we think TSYS takes it to the next logical layer and level, which is to say, a complete rounding out of our products suite, particularly here domestically in the United States.

And I think as we announced at the time of the merger, we believe will have one the largest e-commerce and omnichannel businesses in the world at about $900 million estimated of revenue, and of course, payment facilitation is a big part of that.

[Andrew Jeffrey, SunTrust]

Thank you very much.

[Operator]

Thank you. Our next question comes from the line of David Togut from Evercore ISI. Your question, please.

[David Togut, Evercore]

Thank you and good morning. You highlighted a number of new cross selling opportunities with TSYS and increased conviction in both the revenue synergy and cost synergy target. Is there anything in particular that's driving that increased conviction? Two months post deal announcement?

[Jeffrey Sloan, CEO]

Dave, it's Jeff. Why don't I start, I know Cameron is going to join in as well? Yes, what I would say is, as we mentioned, both in our press release and our prepared marks that we've started our preliminary integration work. And as you know, in most deals, you make assumptions about where you think benefits are going to be. And as we've gotten further into our integration work, we certainly feel more strongly of our better ability to cross more effectively. So, let me just give you a number of examples for that.

Let me start here domestically in the United States with the merchant business. I think Heartland and we talked about as David in our last call has done a fantastic job in the restaurant vertical market. That's particularly true with Xenial and SICOM.

But as we talked about David in May, Heartland Register here in the United States and Heartland Restaurant are very significant initiatives, in combination with Xenial, we think we have the broadest base of restaurants, solutions, hardware and software, front end, middle end and back of the house that anyone has on any of our markets worldwide.

That is not an area while restaurants are something certainly something that TSYS does on the merchant side. We think we've got fantastic depth of markets and bring those solutions into TSYS.

Conversely, we think TSYS has the same thing in the case of Vital POS, which is focused on retail. Again, a market that we're in, but not in the way that we're in with Heartland Register and Heartland Restaurant.

So, having spent some time with the TSYS folks and the TSYS merchant folks in particular, post the announcements. We're very excited about the ability to bring Heartland Vital point of sale into the Heartland, into the Global Payments based here in the United States.

And secondarily, stepping back there is not a lot of dialogue, which I'm sure you'll appreciate about strong customer authentication or SCA, particularly in Europe as the September date approaches.

So, Global Payments today is well-positioned for that day. There have been some conversations as you know, about having that date roll in over a period of 12 months.

Having said that though, TSYS going into the partnership announced at the end of May, which is the ability to combine TSYS's issuing business, which has tremendous positioning in the United Kingdom, in Ireland in Western Europe, for purposes of the EU.

Our ability to combine that issuing business with our inquiring businesses is of TSYS we had going into the announcement for purposes of higher authorization rates now that strong customer authentication is upon us and I think the initial reactions from that TSYS over the last couple of months since the deal announcement within the four walls of TSYS and Global Payments have them positive.

So, I think what I would say is, you have an idea when you head into these things but less two months of integration work within the two companies provide us with more conviction on how real those synergies really in intermediate term.

[Cameron Bready, Senior EVP and CFO]

And David, its Cameron, I'll maybe just build on that to talk a little bit on the expense side as well. We continue to believe that there is over $300 million of expense synergy opportunity by combining the two businesses.

And to Jeff's point, the more opportunity we had to spend with our colleagues at TSYS to export those opportunities in greater detail, the more conviction we have as it relates to our ability to achieve that target at a minimum, but I would say more importantly, the more conviction we have regarding the ability to continue to scale margins as a combined business thereafter.

As I said when we announced the transaction back at the end of May, we’re very focused on taking whatever action we’re going to take in a relatively quick timeframe so that we can achieve the expense synergy target we have, position the business on a combined basis to be successful in the marketplace, but really continue to focus on growing and expanding because we believe we'll have the best rate of top line growth in the industry going forward as a combined company.

That said, we see a long runway for us to continue to scale margins effectively by driving more efficiency in the business over the course of time, even after we achieved that first layer of synergies that were targeting for the business at that over $300 million level.

So, I’m particularly excited about the ability to drive margin expansion in the business at very attractive rates for a long period of time really through the benefits of increased scale and increase economies of scope in terms of how we operate globally.

[David Togut, Evercore]

Thank you. Just as a quick follow-up, Jeff you announced a number of new and ongoing initiatives in Europe and you are really the only merchant acquirer that has set high growth in bank JVs in Europe, how are you thinking about expansion of bank JVs into new countries in Europe. You mentioned in Austria would say versus inorganic growth opportunities in Europe?

[Jeffrey Sloan, CEO]

David, I think there is a little bit of ball there, let's start with the bank JV. I certainly think that while we always being pursuing bank JVs in all of our geographies, I still I think that the partnership with TSYS positions us better than anybody else going forward.

I think to have a poor strategic product issuing combined with acquiring in those markets is actually critical to where I think that businesses are evolving over a period of time. That also ties into the inorganic point as we mentioned before, there are many transactions we look at around the world but especially for these purposes in Europe that had issuing elements and acquiring element and historically Global Payments will look at those and say, I'm good at acquiring but I don’t really have an issuing scale presence to marry up with the issuing assets in those targets.

TSYS of course we do the same thing they would look at those business in Europe and they would say, we're delighted with the issuing opportunities, but we're not in acquiring on outside of United States.

So, certainly as I think about organic but also inorganic opportunities in Europe, the combination of issuing acquiring I think may put us in a unrivaled position relative to anybody else to be a strategic partner to those assets and I'd say both companies have a long history of durable, extensible, bank partnerships worldwide as they mention prepared remarks on the combination of TSYS and Global Payments results in a sophisticated financial institution based of 1300 FI's around the world and I would tell you that durably and extensibility of those partnerships is unmatched relative to all of our direct peers.

[David Togut, Evercore]

Thanks so much and congrats on the strong results.

[Jeffrey Sloan, CEO]

Thanks, David.

[Operator]

Thank you. Our next question comes from the line of Bryan Keane from Deutsche Bank. Your question please.

[Bryan Keane, Deutsche Bank]

Hi, guys. Wanted to just ask about the UK slowdown, we've heard Visa make similar comments, could you just maybe quantify the impact that you guys maybe percentage of exposure. And then Jeff you did touch on SCA, just your latest thoughts there, do you think that will also weight on European results as that goes through regulation over the next 12 months.

[Cameron Bready, Senior EVP and CFO]

Hey Bryan, its Cameron, I'll kick it off and then maybe turn it over to Jeff on the SCA side. So, as it relates to the UK market, as I've said in my prepared remarks, we did see consumer spending slowdown in the second quarter, relative to Q1.

If you look at Visa data which I think reflects I think fairly accurate what we're seeing in the marketplace, I think consumer spending declined in the first half of the year, something like 1.1%, 1.2% something in that range. So, we're obviously seeing the impact of Brexit sort of manifest themselves and consumer confidence in the market. We continue to grow in local currency in the UK. So, we're certainly pleased about that. We continue our trend of growing above the rate of market growth.

In the UK, but obviously, it's not at the same level that we had been growing in the 2018 timeframe, or even in Q1 for that matter. The UK for us today, as you know, on a pro forma basis for TSYS [ph] is probably 4% to 5% of the market of the company, excuse me, as a revenue manager.

So, it's not a particularly big exposure for us going forward. But I think we're continue to be well positioned in Europe overall, as I commented on, in my prepared remarks, Europe overall grew at our targeted rate of growth.

Again, we're well diversified across the continent, the trends that we're seeing in the UK really haven't -- I'd say infected the rest of Europe and our cross-border business in Europe. For e-com omni remains very strong, tailwind for our growth in the overall region. So, I think we're well positioned in the region and we're obviously prepared derived through sort of the choppiness in the UK market that we expect for the foreseeable future.

I'll let Jeff, maybe a comment on the SCA question that you asked.

[Jeffrey Sloan, CEO]

Yes, sure. So, the only I would add to what Cameron said on the UK, as you probably have one of the best new sales periods in the first half of 2019 with new sales in the UK for us at the very significant percentage. Well, in excess of our historical numbers, the last number of years, year-over-year. So, as Cameron said, we like our positioning there. And the rest of Europe seems to be separate in terms of its economic growth, you can see that reflect our numbers.

On SCA, I think these said the same thing, Brian, that the regulators I think, smartly. Even though, the rule becomes effective in September of 2019, have provide some guidance that as long as people continue to make progress, that that will be ruled out really over a 12-month period from September of 2019, I suppose through September of 2020. So, I think that would be less of an issue that otherwise might have been.

Speaking for Global Payments, I would say we're really well prepared. So, I think the way to think about it is not so much how Visa is doing or MasterCard or Global Payments. But instead where the small bank issuers and the small merchants and the tertiary gateways and like, I think that's the area of particular focus.

It's not something that we're altering our view on, as it relates to what our e-commerce and omnichannel business is going to grow at for the remainder of the years. As Cameron just finished saying that businesses coming off of a really good, another really good quarter into the mid-teens consistent with the performance that we've seen over the last three or four years.

So certainly, it's something we're focused on. We think we're ready for it. I would say that over the next 12 months, particularly since TSYS will close a bit earlier now. We're in a unique position, I really mean unique, because the presence of TSYS on the issue inside in the United Kingdom, in Western Europe, in Ireland with the business that they have marrying that issuing solution presents with the acquiring solution that Global Payments has in those markets will allow us. As I said my prepared remarks to affect our own unique and private SCA solution.

So, our ability to avoid any issues but importantly, our ability to avoid started to provide value added services to our customers by keeping SCA authorizations within the four walls of Global Payments and TSYS. It's a unique valid value proposition that we're going to have over the next 12 months is that will also become effective.

So, to be honest, Bryan actually think it speaks to our strengths and further positions Global Payments and TSYS as the partner of choice to merchants and financial institutions, and really nobody else had that if you think about the nature of their businesses.

[Bryan Keane, Deutsche Bank]

Okay, helpful, solid results. Thanks.

[Jeffrey Sloan, CEO]

Thanks, Brian.

[Operator]

Thank you. Our next question comes from the line of Glenn Greene from Oppenheimer. Your question please.

[Glenn Greene, Oppenheimer]

Thanks. Good morning. Congrats on results. I guess the first question, Jeff, on your prepared comments talking about the revenue synergy opportunities. You talked about the debit opportunity, which is kind of someone, it's different from what I've heard before. But maybe you could just elaborate on what she sorts of mentioned the key opportunities there?

And then the follow up question would be capital allocation thoughts once the deal closes, given your sort of significantly improved capital position, actually, and your strong currency, stock currency. So, I'm kind of just thinking about your priorities in terms of doing larger software deals versus International Bank JVs, and just sort of the thoughts on capital allocation close the deal?

[Jeffrey Sloan, CEO]

Sure Glenn. I'll start in the first one and Cameron will address the second question. So, on the first one, and listen, I think our philosophy on marrying issuing with acquiring and not needing a gateway to do it. It's not all that unique to us, and not all that new to us. I think it's similar to what we said in May.

So, some of the examples I gave, I just finished talking to Bryan and in response to Bryan's question about strong customer authentication, our ability to validate as a flood matter those transactions without having to go outside the four walls of Global Payments and TSYS is unique to us, and that's one of the thing that I meant when I talked about marrying issuing with acquiring.

The difference with us Glenn versus everybody else is we don't need to own a debit gateway to do it, instead, we do it technologically. So, if you look at the construct of new Pfizer, or new Fidelity, the way they get at this, and by the way, they only get at in one market, i.e. the United States. And the reason for that is that's where those debit gateways are physically present.

So, number one, we don't actually need to own a gateway and compete with the car brands who are very good at doing that, in order to affect the solutions that I'm describing. Instead, we do it technologically. Hence, the source of my commentary about providing superior return capabilities for our shareholders and for our customers, because we actually do it through tech, we actually need to own the underlying processing in its own right. So, in that instance, and that's what I was referring to Glenn, that is distinctive, number one.

Number two, we can do this globally, putting aside how we do it, because of the presence that TSYS has in North America, in Asia and in particular for these purposes in Europe as it relates to things like strong customer authentication, we can emulate a lot of the value that's provided by the networks by doing within the four walls of Global Payments and TSYS globally.

If you think about new Pfizer, the new Fidelity, those were only based in the United States for purposes of debit services, and gateway services. So, I think we'll have a double advantage of the one I think it's a better mousetrap as it relates to construction of the solution. And number two is worldwide in scope, particularly in markets like the European Union where SCA is already upon us. And that's really what I was trying to refer to. Cameron, you want to dress that.

[Cameron Bready, Senior EVP and CFO]

Yeah, Glenn on capital allocation, so just a couple of comments maybe to kick it off. First of all, you're right in terms of how the combined business will be positioned upon closing, we expect to be roughly 2.5 times levered on a pro forma basis, we expect to have an investment great balance sheet generated in the neighborhood of $3.5 billion of year of EBITDA on a pro forma basis and $2.5 billion of free cash flow again on a pro forma basis.

So, very well-positioned as it relates to the - I think scale and financial flexibility, that's combined business is going to have to continue to pursue its capital allocation priorities.

I would say however, our first and foremost priority upon closing the transaction is going to be to ensure that the combined business is coming together that we're well-positioned as a go-to market strategy, that integration is going smoothly, and that we're executing on and delivering on the commitments that we've made as part of the merger with TSYS. However, obviously, as time passes, we're going to have a lot of capacity to continue to pursue that discipline capital allocation strategy that we have historically.

And I think you should expect that it's going to be focused on many of the same things that we have been focused on historically. Obviously, we're very bullish of our software driven payment strategy. So clearly, adding more vertical software businesses that fit the TSYS, that have the right nexus between obviously SaaS software components and Nexus with payments that allows us to grow both the software side of the business and the payment opportunity and to monetize that effectively, as a combined business will be a core part of the capital allocation strategy.

I think to Jeff’s point earlier, we do continue to see opportunities, particularly with our new issuing capabilities to combine those with acquiring capabilities to pursue additional joint ventures and acquisitions outside of the U.S., particularly in Europe and LatAm for example, where we think those capabilities will be distinctive in terms of our ability to compete for assets in those markets. And obviously, that'll continue to be a part of the capital allocation strategy as well.

And then lastly, I would say, and I want to reemphasize our commitment to maintaining the investment grade balance sheet going forward. Obviously, that is something that as a combined company will pride ourselves on having and we certainly remain committed to maintaining that going forward and maintaining leverage at a level that will support that investment grade balance sheet.

But that being said, we obviously will have ample capacity, I think to pursue a capital allocation strategy that allows us to effectively do the things we've been doing now for the last five to six years in terms of growing and expanding the business globally.

[Glenn Greene, Oppenheimer]

Okay, thank you.

[Jeffrey Sloan, CEO]

Thanks, Glenn.

[Operator]

Thank you. Our next question comes from the line of Ashwin Shirvaikar from Citi. Your question please.

[Ashwin Shirvaikar, Citi]

Thanks. Hi, Jeff, hi, Cameron. Hey, good stuff here. I want to start with asking, you highlighted just the multinational and expanding relationships with HSBC, Caixa, Erste, stressing on the complexity and scale of these, then clearly linking this to the opportunity as it relates to TSYS.

The question is, knowing how large even a single additional one of these sorts of relationships can become, would seem to eclipse the revenue synergy target you have. So, what's your interest level in mining this opportunity immediately is that really fast be factored in, I just want to get a sense of prioritization where this particular opportunity fits for you?

[Jeffrey Sloan, CEO]

Yeah, it's a great question Ashwin. I would say just to be honest, the revenue, sorry, the lowest hanging fruits right here in the United States with the merchant business. So, I gave you few examples, in response to I think David's question earlier this morning.

So, if you just look at the area of most direct overlaps here in the United States in merchant, there are products and services that TSYS has and I gave Vital POS as an example, NTR certifications [ph] would be another one, that Global Payments and Heartland are not as well positioned in today.

Conversely, there were things that Heartland has with Heartland Register, there are things that OpenEdge has, in our 70 vertical markets with OpenEdge that TSYS doesn't have today directly or has a complementary fashion.

So, as it relates to revenue enhancement acceleration, there is a lot of low hanging fruit right here, and that's on the complexity that you just referred to as it relates to those multinational FI partners.

There is a lot of overlap and a lot of ability to - from a product, from a technology point of view to drive incremental revenue right here in the immediate term. I think Cameron was alluding to this, when he talked about a lot of the things being front end loaded, rather than more traditionally, kind of middle and back end, as you might see, in other transactions. So, I think that's the area that's right down the middle of place.

Now, if you step back further, to your point, and you say, well, what else can we do? So, one example would be and Global Payments is doing this already, but TSYS is absolutely going to help immediately is we're already out pitching, you see all this stuff in the newspaper coming out with large FI here domestically have said, we don't think we have the ability to sell cross-border multinational e-com and omnichannel corporate customers at the banks that we'd like to have today.

So, here's an example of large MNCs where Global Payments is already pitching this stuff today with our unified commerce platform I talked about at the beginning of my prepared remarks. Well, there is no doubt whatsoever in my mind, and that's straight sales pitch.

In my mind that TSYS helps accelerate that strategy immediately. So, TSYS can provide additional avenues into more multinational FI that we don't have. And that's a sales pitch that we're already executing on today.

So, I would say now, we're saying the complexity of some of the folks that you just mentioned, there is no doubt in my mind that there are immediate opportunities to help accelerate revenue enhancement, in addition to some elements of the merchant business.

The last thing I'd point out on the same TSYS side, I think its immediate, so maybe immediate to medium term area is the NetSpend. So, I want to make sure we just got that which is to say that their merchant business at TSYS and their NetSpend business at TSYS is a U.S. only business, say for historical reasons.

Well Cameron and I, we're in a number of markets over the last number of months, there is no reason that many of those businesses, merchant we already do overseas. But let's just take NetSpend for this example. There is no reason that business can exist in markets outside the United States.

So, certainly with our footprint with the combined companies scale and scope, our ability to bring NetSpend on prepaid to markets outside the United States is something we're very optimistic about. And by the way, that's not a two-year undertaking, that's something I expect to see happen in the next 12 months.

So, I think very different than some of the other transactions that have been announced. There really is a fair amount of confidence in our near-term ability to affect many of the strategic things on the revenue enhancement side that we've described.

[Cameron Bready, Senior EVP and CFO]

Ashwin, maybe just to build on that a little bit further, as we think about the revenue synergy potential in the business, all the things that Jeff described, but generally think about as organic things that we can do, or start to do day one as a combined company.

To your point, given the new capabilities that will have with TSYS combined with our existing acquiring capabilities, particularly outside of the U.S., the opportunity to leverage that into additional markets, or additional joint venture opportunities that may require some level investment,

I really think of that is incremental, frankly, on top of the revenue synergies that we've targeted generally, because there's investment that's going to go behind the need or the ability to expand into a new market or to establish a new joint venture as we have historically.

So, to your point, to the extent that were able to do that, yeah, on the top line that may eclipse the overall revenue targets that we've established as part of the deal, but I really think about that as being largely incremental to store the organic opportunities that Jeff highlighted in his prepared remarks. And then again, obviously and his response to your question.

[Ashwin Shirvaikar, Citi]

Got it, understood, thank you for that. And then the follow-up is on the earnings themselves, you quantify the incremental FX impact on revenues, but you're also absorbing an impact on margins while still raising margin guidance. Can you comment on what -- so what you would absorbing from a margin standpoint?

[Cameron Bready, Senior EVP and CFO]

Yeah, it's a good question, Ashwin. So, I would say for the full year, I expect currency to be anywhere between a 20 to 30 basis point headwind on margin and probably 400-ish basis points on the bottom-line.

So yes, we've quantified it as a top-line basis, largely because again, we've maintained the current revenue guide, which really is a function of the incremental revenue headwinds from foreign currency offsetting the strong momentum kind of we have in the business. So, we still feel good about the overall revenue target.

But obviously, the execution we've been able to achieve over the course of the year gives -- positions us well to achieve an increase in our overall expectations around margin expansion and earnings per share for the full year. So, the way I generally think about it is the earnings guide is 16% to 18%.

Interestingly, that's our roughly our cycle guidance in terms of earnings target growth, but that's absorbing probably 300 to 400 basis points of currency in earnings. So really on a constant currency basis, that's north of 20%, which I think is a really strong number as an earnings matter for the business.

[Ashwin Shirvaikar, Citi]

Got it. Thank you. Okay.

[Cameron Bready, Senior EVP and CFO]

Thanks, Ashwin.

[Operator]

Thank you. Our next question comes from the line of David Koning from Baird. Your question, please.

[David Koning, Baird]

Yeah. Hey guys, thank you. And I guess my first question, North America looked to us like on an organic constant currency basis accelerated maybe 1.5% of the strongest it's been in about two years, I think we had about 9.5% organic constant currency. And I know that's a function of wholesale keeps getting smaller, Canada was good and U.S. direct is good. I'm wondering, you actually hit easier comps in the back half, is that type of growth sustainable and is US Direct, continuing -- I mean it's obviously taking share within your North America segment. But is that strong level pretty sustainable and maybe even accelerating in the back half?

[Cameron Bready, Senior EVP and CFO]

Yeah, David, its Cameron, so I think your math is pretty good to be honest with you. I've got North America kind of normalized constant currency growth in the quarter of about 9.5% pretty close to what you what you suggested and X wholesale, that's almost a point higher, so closer to 10.5%, which is really at the high end of our cycle guidance.

Obviously, the U.S. Direct business is north of that, which, again, reflects continued very strong performance across our integrated and vertical market channel as well as our relationship channel continues to perform really well.

So, I think the short answer to your question is yes, the back-half expectation sitting here today is that those trends can persist around those same levels. I think we feel good about the momentum we have in the business and notwithstanding, the incremental currency headwinds, we're absorbing and revenue, the way we're really offsetting that is strength in the North America business and more particular strength in the US Direct channels that continue to help us absorb incremental FX in regions outside of the US.

So, the long and short of it is yes, the expectation for the balance of the year is that this level of performance in the North American business persists. And we continue to feel good about the momentum that we have as we enter into Q3 and Q4 as a revenue matter.

[David Koning, Baird]

Great, thanks. I guess just the one follow-up, it looks like free cash flow in the first half was a little lighter than normal. Does that mean you get a big catch up in the back half and have just a ton of free cash flow kind of that used for buybacks or whatever else in the back half?

[Cameron Bready, Senior EVP and CFO]

Yeah, I would look at its extra timing items that we've sort of highlighted on the schedule, because I think that's the best representation of really cash it’s in the business and available for us. And if tracking close to $0.5 billion for the first half, so we're on target for the billion dollars target we have for the full year.

There is a lot of noise in that sort of timing items, some of it is flip between reduction of liabilities, but it's coming out of restricted cash, because we're holding customer cash then rolls out in the next quarter. So, it's the best way to look at it sort of extra timing items the way that we've highlighted on the trended financial statement. That's really the cash that's in the business and available for us to utilize.

[David Koning, Baird]

Great, thanks, guys. Good job.

[Cameron Bready, Senior EVP and CFO]

Thanks, David.

[Operator]

Thank you. And our final question comes from the line of Steven Kwok from KBW. Your question please.

[Steven Kwok, KBW]

Hey guys, good quarter. And thanks for squeezing me in. Just two quick questions, just one around the U.S. wholesale market, improved a little bit, but I believe TSYS has a little bit of the wholesale market as well. What's your thoughts on that, is that going to be a bit of a runoff as you integrate TSYS as well?

And then second question is just around the interest rate environment, given the outlook for lower rates. Now, is there any further potential to lower your debt costs? Thanks.

[Jeffrey Sloan, CEO]

Yes, Steven, it's Jeff, I'll start on the U.S. wholesale. I'm sure Cameron will comment on the rates question. So, what I would say is if you back up and you look at how we think about it, when I came to Global Payments, the U.S. wholesale business was probably 50%, if not more of the US business, number one.

Number two, we also lacked in addition to math, we also lacked the diversity of distribution. So, with the exception of our gaming business, with the exception of APT when we bought it in 2012, we didn't really have a lot of direct sales in the United States away from the wholesale business. So, I think those two things really drove on the strategy that we've been talking about for last four or five years which is the same emphasis that the direct business and less of an emphasis on the wholesale business.

We're lowering that position, so we have plenty of direct distribution on a combined basis with TSYS the wholesale business partner 5% of the commodity company but probably most important this event we have a lot of direct distribution affable payments and certainly at TSYS.

So, I don’t think about it the same way as I thought about it in six or seven years ago, because those two issues we have there predominate Global Payments which is to say lack of diversity of distribution and concentration are not issued the Global Payments have today but especially for these purposes, there are not issues that pieces in Global Payments will have.

So, I certainly think we feel very different about that, I would also add in there that Global Payments historically going back six or seven years have a lot of concentration among very few customers in the ISO business, TSYS doesn’t have that either. So, I think going forward too much better mouse trap overall with a combined companies and I don’t think we approach it the same way rather I think we look at it openly and think about what's the best thing for the combined business.

[Cameron Bready, Senior EVP and CFO]

And Steven on your rate question I'll start by saying of course loss on us that we're in a very attractive rate environment in general and I will start with the credit agreement that we executed earlier in July, we were delighted with the outcome of that, we prized our revolving credit facility in term loan A, given our expected credit rating and LIBOR plus 137.5% basis points, which is obviously an improvement over where our pricing is today and interestingly where TSYS is as well.

So, we feel good about gotten that aspect of the permanent capital structure in place at very attractive terms. The remaining aspect of the capital structure that we need to put in place prior to closing is really in expectation around about $2.5 billion senior notes offering that we expect to execute here over the coming months as we lead up to closing of the transaction and actually to your points we recognize at the rate environment in which to get that done is pretty attractive for us today.

We also recognize that, given the mix of the business geographically particularly overseas there can potentially be opportunities for us to take advantage even at lower rate environment in the UK and Europe that would allow us to lower the overall cost of debt for the pro forma business as well.

So, more to come on that as we continue to execute against our plans to establish the permanent capital structure for the combined business between now and close but I would say certainly the rate environment that were seeing and the execution we been able to achieve thus far gives us a lot of confidence that there's some potential upside as relates to the accretion expectations we have for the transaction on the heels better-than-expected financing rates.

[Steven Kwok, KBW]

All right. Thanks for taking my questions.

[Winnie Smith, VP, IR]

Thanks Steven. On behalf of Global Payments, thank you very much for your interest in our company and thank you for joining our call this morning.

[Operator]

Thank you, ladies and gentlemen, for your participation on today's conference. This does conclude the program. You may now disconnect. Good day.