Corpay, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Greetings. Welcome to the FLEETCOR Technologies, Inc. Second Quarter 2017 Earnings Conference Call. As a reminder, this conference is being recorded.

[I would like to turn the conference over to our host, Mr. Eric Dey, Chief Financial Officer for FLEETCOR Technologies. Thank you. You may begin.:]

[Eric R. Dey:]

Good afternoon, everyone, and thank you for joining us today. By now everyone should have access to our second quarter press release. It can be found 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' similarly titled 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 2017 guidance on both a GAAP and non-GAAP basis with a reconciliation of the 2.:]

[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 2017 guidance, new products and fee initiatives and expectations regarding business development and timing of acquisitions and dispositions. They are not guarantees of future performance, and therefore, you should not put undue reliance on 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 in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Others are described in our annual report on Form 10-K. These documents are available on our website, as previously discussed, 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.:]

[Ronald F. Clarke:]

Okay. Eric, thanks. Hi, everyone, and thanks for joining the call this afternoon. Upfront here, I'll plan to cover 2 subjects. First, I'll comment on our Q2 results and rest of year outlook. And second, I'll provide an update on some recent developments.

[Okay, so on to the quarter. We reported very good Q2 results, generally consistent with our internal expectations. We reported revenue of $541 million, up 30%; and cash EPS of $1.99, up 26%. That's back-to-back quarters of profit growth above 25%.:]

[The macro overall was a nonfactor in our Q2 earnings. Fuel price and fuel spreads were a bit favorable, but FX, interest rates and our tax rate were unfavorable versus the prior year. So again, overall neutral macro against profits.:]

[Organic growth, 9% in Q2 with fuel card revenue growth of 8%. Revenue growth in our other 4 major product lines was double digit. That excludes our all other category.:]

[Same-store sales finally strengthened in Q2 to plus 1%. We had particular strength in lodging and corporate payments. Q2 sales grew 7% versus prior year, with 2 of our smaller international markets, Mexico and Russia, grew sales 100% versus last year. Q2 cash flow expanded to $125 million, up 40% versus last year and up $70 million sequentially versus Q1 '17. Q2 global customer revenue retention was 91.5%. That's 9 consecutive quarters of 90%-plus retention.:]

[So in terms of drivers for Q2. Basically, 3 things. One, STP made a big contribution. We didn't own that last year. It grew 14% on a pro forma basis. Again 9% organic growth, about $40 million flowed through into earnings. And last, we had about 1 million fewer shares outstanding.:]

[I do want to point out that a few things did not go as well as we planned in Q2. The Comdata MasterCard portfolio that we didn't convert in Q1 suffered some onetime losses in Q2 due to a bumpy IT conversion. Fortunately, the U.S. MasterCard portfolios that we didn't convert to a new platform continued to grow quite well, up 34% in the quarter. So the one we converted, not so good; the ones that we didn't convert, still growing nicely.:]

[Our Comdata trucking money movement products, eCash and Comcheks, are quite soft in the quarter. We're moving to replace both of those with new fresher versions. And STP was just a bit delayed in some of its pricing actions as we chose to test our way in a bit more slowly.:]

[But look, all in all, a good solid quarter, good profit growth and really kind of a good first half of 2017.:]

[Okay, let me transition over to the outlook for the rest of the year. Starting with the macro. So basically, outlooking neutral macro for the second half. FX will be better. Interest rates will be worse. But on an overall basis, neutral for rest of the year.:]

[Operating performance should be quite similar to Q2. Things that are going well will continue to go well. There's a couple of soft spots, the Comdata MasterCard portfolio that we converted and the Comdata money movement products probably soft still for around -- for the second half, but expect an acceleration in our corporate payments business. They brought on a lot of new business that will get implemented in the second half that's been previously sold. And STP will gain on some of the pricing initiatives and some of the new channel -- sales channel initiatives in the second half. Speedway should be fully ramped by September heading into Q4, and we continue to roll out these Pac Pride extended network cards. So these set of positives should absorb a couple of the weaker spots that we mentioned.:]

[And then finally, we're expecting a rebalancing of our portfolio here in the second half, replacing our telematics business, Nextraq, with our international payments business, Cambridge. So obviously, that trade should result in faster revenue growth next year.:]

[So these expectations result in the following 2017 guidance adjustment:]

We'll raise full year 2017 cash EPS guidance $0.03 from $8.31 to $8.34 at the midpoint. So this -- that reflects a $0.03 beat here in Q2, effectively leaving our rest of year guidance unchanged. This guidance assumes the portfolio rebalancing I mentioned; Nextraq out, Cambridge in. That will be about $0.03 unfavorable in the second half, but that will be offset by the ASR, which will be $0.03 favorable in the second half.

[Our second half organic growth overall should pencil out at around 8% or 9% with slower fuel card growth in the second half, again due to that bumpy MasterCard conversion.:]

[Okay, let me shift gears and talk about some recent developments. So first up, on the capital allocation front. We announced we just refinanced our term debt facility increasing our liquidity and extending our maturity. So we raised another $700 million in term debt favorable rates. The term A and revolver staying put at L 175 and the term B rate improving 25 bps to L plus 200. Term A revolver maturity extended 5 years; and the B, 7 years. And that raise was oversubscribed.:]

[We also completed our telematics Nextraq sale to Michelin for $320 million in July, so we now have that cash. So basically, this new raise and sale gives us the available liquidity to close and fund Cambridge, fund the $250 million ASR, potentially do more open market share buybacks or acquisitions going forward. And looks like it will leave our pro forma leverage ratio at year-end at under 3x, our target.:]

[On the partner relationship front, some good progress this quarter. We're delighted to announce that Uber has extended their relationship with us, so happy to continue to grow that program with them. Speedway, we progressed the implementation quite nicely, now 75% complete, expected to finish in September. That will lift revenues in Q4 and into next year, so that conversion going well. And we've also gotten closer to some decisions on some new international partner opportunities, so hopeful that a couple things there will come to a conclusion.:]

[On the acquisition front. Cambridge, expect to close Cambridge by September 1. We've now received regulatory clearance. We've received approvals and/or waivers for all the necessary state money transmitter licenses. We finalized our year 1 transformation, integration plan and appointed one of our executives to lead the transformation effort. Cambridge is out looking 20%-plus revenue growth in calendar '17.:]

[You may have seen the SVS announcement. We have decided mutually with First Data to terminate our gift card JV. The challenge, time line and costs associated with the regulatory process, is what led us to reconsider the decision and move forward independently, retaining SVS. We're in the process now of reworking our growth plan for SVS, and we'll revert with those thoughts and ideas later this year.:]

[STP, hard to believe but coming up on our 1-year anniversary. That acquisition business performing well, low teens revenue growth in the first half. Many of our transformational initiatives now taking hold. Some pricing, lower credit losses, traction on some new sales channels and testing of a new revamped IT system, so quite pleased so far with STP and its prospects.:]

[In terms of pipeline, we are still active, working some new potential acquisitions, specifically a couple attractive tuck-ins. So we'll keep you posted as we get closer there.:]

[Let me give you an update on system conversion or migrations. We've worked on 3 IT conversions in the first half of 2017. Two have gone well or very well and 1 has gone not so well. So on the good news front, we did convert our Comdata processing mainframe infrastructure from running in the Comdata office building to running on the IBM cloud. This is good. It's -- it helps in terms of processing speeds, it will lower our IT costs going forward and it gives us better disaster recovery if we should ever need it.:]

[Second conversion. I mentioned earlier Speedway. We've converted 75% of that portfolio to FLEETCOR systems. The conversion has gone well -- quite well, and again, expect to wrap that up in Q3.:]

[On the not-so-good front, we converted a portion, one of our direct MasterCard portfolios off of the Comdata mainframe in Q1. We had problems converting the history or client balances. That led to several weeks of delays in billing, some errors in billing, unfortunately long wait times in customer service. And as a result, we've seen a number of clients leave the program in Q2 because of those bumpy IT issues. Fortunately, we've now corrected those conversion issues. The service is running normally again. And client attrition seems to have plateaued, so we're back at trying to rebuild that portfolio.:]

[So look, in conclusion, again a good Q2, good growth, 26% profit growth, back-to-back quarters of 25%-plus profit growth. Basically, a neutral macro environment here in Q2 and previously in Q1. And overall, we're out looking basically a neutral environment rest of the year. So glad to be off that subject.:]

[Our second half outlook is up sequentially, expecting 20% profit growth for full year 2017. We're rebalancing the portfolio, the faster-growth businesses. Nextraq out, Cambridge in. We're strengthening our capital base, returning capital to shareholders, still increasing our liquidity and still maintaining a less-than-3x leverage ratio. Still on the hunt for some new partner deals and have extended our relationship with Uber. And we feel like we're past the distractions of the first half and getting back to work, back to business. So net-net, we feel pretty well positioned to finish the rest of '17 strong and take some of that momentum into 2018.:]

[So with that, let me turn the call back over to Eric. Eric?:]

[Eric R. Dey:]

Thank you, Ron. For the second quarter of 2017, we reported revenue of $541.2 million, up 29.5% compared to $417.9 million in the second quarter of 2016.

[The revenue from our North American segment increased 14% to $343 million from $301.1 million in the second quarter of 2016. Revenue from our international segment increased 70% to $198.2 million from $116.8 million in the second quarter of 2016.:]

[For the second quarter of 2017, GAAP net income increased 12.7% to $131 million or $1.39 per diluted share from $116.3 million or $1.22 per diluted share in the second quarter of 2016.:]

[The other financial metrics that we routinely use are adjusted revenues and adjusted net income, which we sometimes also refer to as cash net income or cash EPS. Adjusted revenues equal our GAAP revenues less merchant commissions. A reconciliation of adjusted revenues and adjusted net income to GAAP numbers are provided in Exhibit 1 of our press release. Adjusted revenues in the second quarter of 2017 were $510.6 million, up 29.1% compared to $395.6 million in the second quarter of 2016.:]

[Adjusted net income for the second quarter of 2017 increased 24.7% to $187 million or $1.99 per diluted share compared to $150 million or $1.57 per diluted share in the second quarter of 2016.:]

[As a reminder, 2016 adjusted net income per diluted share reflected the impact of adoption of the new accounting rules for stock option-based compensation.:]

[Second quarter results reflect the impact of the macroeconomic environment. Changes in foreign exchange rates from the second quarter of 2016 were primarily negative and overall, we believe, negatively impacted revenue during the quarter by approximately $5 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 $5 million.:]

[And finally, spreads were favorable as fuel prices dropped during the quarter, which increased market spread margins. As a result, we believe spreads positively impacted our results by approximately $15 million. So in total, the impact of those changes positively impacted our second quarter revenues by approximately $15 million and adjusted net income per diluted share by approximately $0.05.:]

[Organic growth was approximately 13% for the second quarter of 2017 or 9% when excluding the impact of the macroeconomic environment.:]

[Now let's shift over and discuss other drivers of our second quarter performance. All of our major product lines performed well during the quarter. Our fuel card business grew 13% during the quarter and 8% on a macro-neutral basis. The fuel card business was impacted by the MasterCard conversion in the first quarter, as Ron mentioned earlier, which impacted volumes and revenue for the portion of that MasterCard portfolio that was converted. However, the U.S. MasterCard portfolios that we did not convert continued with their fast growth and were up over 30% in the quarter. Although the conversion issues have been mostly resolved, we do expect that volumes in the converted portfolio will continue to lag the rest of the year.:]

[Our corporate payments business continues to grow well and was up 12% during the quarter. Our tolls business was up 13%, lodging was up 16% and the gift business up 11%. So all in all, another solid quarter for our businesses.:]

[Now moving down the income statement. Total operating expenses for the second quarter were $325.2 million compared to $246.7 million in the second quarter of 2016, an increase of 31.8%. As a percentage of total revenues, operating expenses increased to approximately 60% of revenue compared to 59% in the second quarter of 2016. Included in operating expenses are merchant commissions, processing expenses, bad debt, selling and general and administrative expense, depreciation and amortization expense and other operating net. Included in the second quarter of 2017 operating expense were ongoing expenses related to the acquisitions closed in 2016. Also, stock-based compensation expense in the second quarter of 2017 was $21.2 million compared to $17.6 million in the second quarter of 2016. And deal-related expenses were approximately $1.2 million in the second quarter of 2017 versus approximately $300,000 in the second quarter of 2016.:]

[Credit losses were $14.7 million for the second quarter or 9 basis points compared to $6.9 million or 5 basis points in the second quarter of 2016. The increase in bad debt was primarily due to bad debt inherent in the acquired STP business and the addition of new euroShell locations and, to a lesser degree, normal quarterly fluctuations of certain businesses.:]

[Depreciation and amortization expense increased 33.6% to $64.7 million in the second quarter of 2017 from $48.4 million in the second quarter of 2016. The increase was primarily due to the STP acquisition. Interest expense increased 50% to $23.9 million compared to $15.9 million in the second quarter of 2016. The increase in interest expense was due primarily to the impact of additional borrowings for the STP and Travelcard acquisitions and increases in LIBOR.:]

[Our effective tax rate for the second quarter of 2017 was 31.2% compared to 28.4% for the second quarter of 2016. The 2016 tax rate was favorably impacted by a onetime recovery of purchase price from our equity method investment that favorably impacted pretax earnings but was not subject to income taxes.:]

[The 2016 rate was also favorably impacted by higher excess tax benefits on share-based compensation in the second quarter of 2016 versus the second quarter of 2017.:]

[As a reminder, a change in accounting for stock-based compensation for tax purposes went into effect January 1, 2017, which results in the excess tax benefit on share-based compensation to be part of the effective tax rate. The standard also requires the recasting of prior year results for comparability.:]

[Now turning to the balance sheet. We ended the quarter with $765.6 million in total cash. $201 million is restricted and consists of primarily customer deposits. As of June 30, we had $2.3 billion outstanding on our term A loan, $244 million outstanding on our term B loan and $506 million drawn on our revolver, leaving $529 million of undrawn availability. We had $741 million borrowed on our securitization facility at the end of the quarter.:]

[On July 17, we closed the sale of the Nextraq business for $320 million in cash or about $255 million after tax.:]

[Today, we announced the successful upsizing of our senior credit facility by $709 million and extended the facility to a new 5- and 7-year terms on the term A and B facilities, respectively. The lenders have agreed to an amendment that increases the term A loan to $2,690,000,000, increases the revolver loan to $1,285,000,000 and increases the term loan B to $350 million. The term loan A and revolving pricing remains the same, currently LIBOR plus 175 basis points. And the term B pricing was reduced by 25 basis points to LIBOR plus 200 basis points.:]

[We intend to use this new facility to help finance the Cambridge acquisition and provide liquidity for future share buybacks and M&A.:]

[Today, we also announced that the Board of Directors has authorized an increase in the previously announced share repurchase plan from $500 million up to $750 million and extended the share repurchase plan by 18 months.:]

[We also announced that it has entered into a $250 million accelerated share repurchase program, under which we will repurchase 250 million of our common stock. This ASR is part of the $750 million authorized amount. We plan to use the proceeds from the Nextraq sale to finance the ASR.:]

[The company had previously spent approximately $240 million under this plan and has repurchased approximately 1,670,000 shares at an average price of approximately $144 per share.:]

[As of June 30, 2017, our leverage ratio was 2.64x EBITDA, which is well below our covenant level of 3.75x 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 $17.8 million on CapEx during the second quarter of 2017.:]

[Now on to our outlook for the remainder of 2017. First, I want to update you on our latest thinking about the macroeconomic environment for the balance of the year. The good news is that in total, the macro came in mostly where we thought it would be. The current trend is for fuel price and spread to continue to be at our prior guidance level for the balance of the year. And although foreign exchange rates are trending a little favorable to our prior guidance, higher interest rates will offset the slight macro gain, so about neutral when you include interest.:]

[Also, we have a lot of moving parts for our guidance this quarter, including the sale of Nextraq during the quarter, which will create a headwind for the rest of the year but will be somewhat offset by the previously announced Cambridge acquisition, which is expected to close by September 1, and the impact of the accelerated stock repurchase program. The good news is that on an annualized basis, these events are cumulatively accretive, but they will not be for the balance of the year purely because of timing.:]

[With that said, our financial guidance is as follows:]

total revenues to be between $2,195,000,000 and $2,245,000,000, GAAP net income between $545 million and $565 million, GAAP net income per diluted share to be between $5.80 and $6, adjusted net income to be between $775 million and $795 million and adjusted net income per diluted share to be between $8.24 and $8.44. This guidance represents approximately a 20% growth in revenue and 20% growth in adjusted net income per diluted share for the year at the midpoint of the range.

[Some of the assumptions we have made in preparing this guidance include the following:]

weighted fuel prices equal to $2.43 per gallon average for 2017 in the U.S. for those businesses sensitive to the movement in the retail price of fuel; market spreads returning closer to historical levels, no change from prior guidance; foreign exchange rates as of June 30, 2017, a slight increase from prior guidance; the SVS business is retained for 2017; interest expense of $108 million for 2017; fully diluted shares outstanding of 94 million shares, and this assumes approximately a 600,000 share impact from the ASR for the rest of the year; a full year tax rate of 29.2%.

[As a reminder, a change in accounting for stock-based compensation for tax purposes went into effect January 1, 2017, which allows for the excess tax benefit on share-based compensation to be part of the effective tax rate.:]

[As a result, the tax rate can be volatile and is impacted by the number of stock options exercised or restricted shares vested in a quarter. The company believes that the balance of the year tax rate could fluctuate between approximately 29% and 31%.:]

[The Nextraq business was sold on July 17 and is not included in the company's rest of year guidance. The impact of removing Nextraq is approximately $0.08 in adjusted net income per diluted share for the remainder of the year based on our prior guidance, and the company estimates it will recognize a gain on the sale of Nextraq of approximately $90 million or $0.95 per diluted share and is not included in guidance.:]

[The company anticipates that the Cambridge Global Payments acquisition will close by September 1 and is, therefore, included in guidance. The impact of the Cambridge acquisition on our second half guidance is approximately $0.04 to $0.05 in adjusted net income per diluted share and no income related to acquisitions or material new partnership agreements not already disclosed.:]

[In summary, our guidance for the full year builds as follows:]

previous guidance range of $8.21 to $8.41, add the $0.03 Q2 beat of our Q2 guidance, remove the sale of Nextraq for the remainder of the year of approximately $0.08 in adjusted net income per diluted share, add the impact of the Cambridge acquisition of approximately $0.04 to $0.05 in adjusted net income per diluted share net of deal-related expenses, add the impact of the $250 million ASR on the balance of the year of approximately $0.03 in adjusted net income per diluted share, which equals our revised full year guidance range of $8.24 to $8.44.

[In terms of guidance for the third and fourth quarters, I want to remind everyone that the company's revenues and profits normally build sequentially throughout the year, resulting in higher revenue and profit in the third and fourth quarters. Also the above-mentioned items will impact revenue and profit in the third and fourth quarters. As a result, we believe our revenue and profit in the third quarter will be higher than the second quarter and our revenue and profit in the fourth quarter will be higher than the third quarter, driven by the timing of the above items. For the third quarter, we are expecting adjusted net income per diluted share to be in the range of $2.09 to $2.16.:]

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

[Operator:]

[Operator Instructions] Our first question comes from the line of Ramsey El-Assal from Jefferies.

[Ramsey El-Assal:]

I was wondering if you could talk about your organic growth trajectory kind of moving through Q4 and then to early 2018. I know you called out a lot of kind of puts and takes and some factors that might point to some acceleration there. I was just wondering if you could kind of help us think through what that rate will be into 2018.

[Eric R. Dey:]

Ramsey, this is Eric. I would say our range is pretty consistent with where we've been in the past. I mean, to kind of give a range, I would say we're kind of in the 8% to the 10%, 11% range is where we'd think about where we're going to be next year, give or take. We obviously haven't spent a lot of time building our 2018 budget at this point, but that would be our expectation if I had to say it right now.

[Ramsey El-Assal:]

And then I guess, on a related note, now that STP is going to cycle soon, I mean, what's the growth rate in that asset, in that business that you're anticipating going forward? Are we -- should -- I'm assuming we're expecting to see some acceleration there as some of your programs kind of take -- gain a little more traction, is that a fair assumption? And if so, could you help us kind of quantify what that rate might be?

[Ronald F. Clarke:]

Ramsey, it's Ron. So kind of first half, I think I said low teens. I think the second half will be closer to high teens to 20%. And I'd say we would stay at that level probably at least the first 6 months of next year and then probably mid to high teens.

[Ramsey El-Assal:]

Okay. And then lastly, I wanted to ask you about the Uber deal, which sounds very interesting. As I recall before, that was a really fast-growing contract. What is the nature of the extension? Are you rolling this out to a much broader group of drivers? Is it a broader geography or just more -- different types of drivers in the U.S.? And could you kind of help us think through the model there that you're evolving into and then also potentially what the impact might be in the numbers.

[Ronald F. Clarke:]

Yes. So the short answer is it's just more term. They're happy, we're happy, so they added more term to the existing deal. We're still trying to figure out how to take the program internationally, so that's still a work in process.

[Operator:]

Our next question comes from the line of David Togut with Evercore ISI.

[David Togut:]

What was the growth rate in the direct MasterCard product in the second quarter? And how would you expect that to look in Q3 and Q4?

[Ronald F. Clarke:]

Which is the direct -- you're saying direct MasterCard?

[David Togut:]

Right. So the interchange-centric product, you called out some issues with portfolio conversions. Historically, you'd give an overall growth -- revenue growth number for that business, sometimes unit, sometimes revenue as well.

[Ronald F. Clarke:]

Yes, I don't have it handy. I think what we quoted is our collective set of U.S. MasterCard products, I think, was a combo of the one we converted which went a bit into the ditch and the ones we didn't grew 34. I think the combination of all of those was plus 17%. The happy stuff that didn't convert and the sad stuff that convert, I think the consolidated number was 17%.

[David Togut:]

And how would you expect that to trend in the back half of this year?

[Ronald F. Clarke:]

Well again, I would say per my comments, likely down, right? I tried to be as transparent as possible that we took a bit of a divot in this conversion. We did the conversion, and it took a while to get a read on it. And basically, the read of what we converted was not great. So we'll see obviously more of that as we go into kind of Q3 and Q4. So that particular portfolio will probably be flat over the next couple of quarters. And the other 5 or 6 MasterCard portfolios, we would expect will continue growing at a pretty -- 20%-plus rate. So that's -- so I'd say it's still unclear, David, what the shape of that particular file that we converted, but we forecasted it to be kind of flat the next couple of quarters.

[David Togut:]

Understood. And then you called out a 1% growth in same-store sales, which is a nice improvement. Could you sort of drill down into the drivers of that, perhaps by geography? I mean, just where do you see the biggest changes in same-store sales?

[Ronald F. Clarke:]

Yes. Again, as you know, it's across a lot of places, but I'd say the Brazil thing got better. The employment piece, at least the line of business we're in the -- transport piece got significantly better. The lodging piece, which, I think, we had on our [ excuse sheet ] a year or so ago is in the rearview mirror. Those things are now back to positive. The corporate payments business was quite healthy to date. So I think it's -- again, when we hit this consolidated number, I think, was 1 point, 1.5 points negative. It's 4 or 5 pieces, David, moving in the right direction that brings kind of the total from minus 1 to plus 1. So it's not one thing. It's literally probably 4 or 5 things that went a bit our way this quarter.

[David Togut:]

Understood. And then could you update us on the growth rate in the large fleet market? You had the big sales force expansion there with Comdata post that acquisition, been running up, I think, double digits previous quarters. What were you seeing in Q2?

[Ronald F. Clarke:]

When you say the large -- clarify the question though, when you say the large.

[David Togut:]

Well, looking at the acquired fleet business from Comdata where you had the big sales force headcount expansion, and you got that up to double digits in previous quarters, I'm just wondering what the growth rate was in Q2 revenue-wise.

[Ronald F. Clarke:]

Yes. Let me look at -- I've got the sales number, I think, handy here. Hold on 1 second. I don't have the revenue number, but I do have the sales number handy. Sales were up about 20% combined for the old Comdata business -- fleet business over the prior year. That's up 100% basically over 2 years ago when we started the expansion of people. So that productivity is obviously getting healthy now and obviously way up from when we bought the thing.

[David Togut:]

Got it. Quick final question from me. You mentioned an internal and external investigation that you launched a few months ago. What's the update in terms of any findings by both the internal and external teams?

[Eric R. Dey:]

David, this is Eric. I guess, just to kind of summarize. As we've said before, we believe we're on very solid ground and that all of our fees and billing practices are compliant with all the laws and regulations. To answer your question a little bit, we have completed the legal review. But unfortunately, in light of the recent securities lawsuits, we've been advised that we really can't comment on those reviews.

[Ronald F. Clarke:]

But we have completed them, David. They are complete. And I think we reiterate what we said before that our view, management view is we are in compliance with every law that regulates our business.

[Operator:]

Our next question comes from the line of Ashish Sabadra with Deutsche Bank.

[Ashish Sabadra:]

Just maybe a quick follow-up on the IT issues in the portfolio. So is there a way to quantify how much the impact was from that or what the growth would have been excluding that hiccup?

[Ronald F. Clarke:]

2% to 3%, Ashish, in Q2.

[Ashish Sabadra:]

Okay, that's great. So that would imply that the growth would have been more like 11% to 12% organic excluding the impact of that portfolio?

[Ronald F. Clarke:]

You got it.

[Eric R. Dey:]

I think it would have been around 11%, Ashish.

[Ronald F. Clarke:]

Yes. And the fuel card would have been 11% instead of 8%. So when we gave you 10% for calendar '17, we didn't expect to have an IT divot in the start of the second quarter so...

[Ashish Sabadra:]

Okay, that color is definitely very helpful. And just plans for SVS now that -- yes, what do you plan to do with SVS? Do you plan to keep that around? Or is there other optionality on that business?

[Ronald F. Clarke:]

Yes. I mean, it's been a long saga for you guys as well. So I'd say that we obviously considered some other alternatives, right, prior to entering into the deal with First Data. And b, we've gotten a bit smarter. We've now owned it, whatever, 2-plus years. So we're going to go back -- the guy running that is a very good guy. We're going to go back basically and dust off some of the other options and dust off his 3-year growth plan, which we reviewed a bit ago and come back to you guys probably next call with some clear review of what we're going to do.

[Ashish Sabadra:]

That's helpful as well. And just on the corporate payment side. You talked about some of the sales, which were -- the solid traction that you've had, you'll start to see conversions into revenues going forward, which is actually growth. But just in terms of -- I was wondering if you could give any more incremental color in terms of how's the pipeline looking for growth going forward in terms of new implementations and increasing market share with your existing client base.

[Ronald F. Clarke:]

Yes. I mean, the business is performing great. Sales in that line, the business were up 35% in the quarter. I think we told you they were up 50% the prior year over the first year. So the sales are good. And that conversion time is about 12 to 18 months, so it's relatively easy for us to plan what the second half and next year is going to look like as we fundamentally have sold virtually all the business as of today that will hit revenue in the second half and in '18. And so again, that business is trending, I think, 14% -- 13%, 14%, 15% this quarter. It will step up a bit. So it's great. And then, obviously, on top of that, we have the Cambridge thing that we expect to close this month, and that gives us some great cross-sell opportunities, some ripe accounts to deliver those same domestic AP products in this. So we've grown to like that business a lot.

[Operator:]

Our next question comes from the line of Danyal Hussain with Morgan Stanley.

[Danyal Hussain:]

On the IT conversion, it sounded like attrition deteriorated over the course of the second quarter and it's stabilized by this point but just mathematically I guess the impact to the third quarter and to the back half would be greater than that 2% to 3% you called out? Could you just -- do you have an estimate for what that impact will be in the back half and what you're baking into the 8% to 9% organic number you gave?

[Ronald F. Clarke:]

Yes, that's a good question. I'd say it's probably in our forecast 1 point more because we didn't pick up the loss rate really until sometime in Q2. So obviously, the exit rate in June was a bit higher than the average for the quarter. So I'd say it's probably in our forecast another point of divot in 3 and 4.

[Danyal Hussain:]

Okay, perfect. And then just on, I guess, the rest of that portfolio, it sounds like you've only done part of the conversion. Is there more that's in the plan for this year? Are you going to hold off? What's your confidence that the rest of it should go through smoothly?

[Ronald F. Clarke:]

That's a rhetorical question, but the answer is yes. We're kind of taking a pause. I mean, I make the joke -- I don't know if you're a sports guy, but you can never bat 1,000 or make 80% 3 pointers or whatever. And I guess, in IT conversion, you can't bat 1,000 either. And so we've had a lot of success. I tried to call out some to give some credit to our IT people, but this one obviously did not go great. So we are doing the postmortem and making sure that this never happens again. So we'll stage it different. We'll have different people reviewing it. So I'd say that we're going to be super duper sure the next time. So it probably won't be any time this year.

[Danyal Hussain:]

Got it, perfect. And just a quick one just on cash taxes. Eric, it looked like they picked up this quarter. Could you just talk about how you expect cash taxes to look going forward versus GAAP?

[Eric R. Dey:]

We -- I think what I guided to is 29.5% for the balance of the year. As I stated in my script, there's a lot of moving parts with the change in the accounting convention for stock-based compensation. It can actually move the number around a little bit. If you recall, we had a 26% tax rate in Q1. It was because we had more than anticipated shares that were exercised in the quarter. And then in the second quarter, we had fewer than we'd anticipated, which caused the tax rate to go up a little bit. But I would say in the back half of the year, we're still anticipating around a 29.5% tax rate.

[Operator:]

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

[Robert Napoli:]

That STP business, Ron, I think your goal was to get that revenue growth rate up to 20%. You had a -- you're in the low teens, but the transaction growth is nominal. You're getting very good revenue per transaction. What is the strategy? Do you still think 20% is a reasonable place to get that? And what is the game plan from the mix of transactions? I know that business was mispriced and you have a pretty broad game plan with that business.

[Ronald F. Clarke:]

Yes. So I'd say, Bob, the goal is still -- in fact, in our forecast, it's either high teens or actually hitting 20% as we exit. So to your point, we're resegmenting the higher-value people and then we've got some different sales channels that will also bring in some higher-value people. And then we've got a longer-range plan, where some of those new toll roads are expected to come online. And so the business is fighting. Just a general malaise in the economy and particularly in the trucking sector, which is a big part of the transaction, so that's one of the places the same-store sales are still quite soft, which is bringing the trend count down. But again, we don't -- today, the company doesn't get paid very much from that group. So it's not as big an impact on revenue. But I'd say that we're well along on a bunch of these plans, the repricing plans, the new sales channel, the IT stuff to enable some of it. The toll road thing is legislated. So I'd say our confidence is still quite high that, that's a close to 20% business in the midterm.

[Robert Napoli:]

Okay. And then just on the fuel card business. I mean, your competitor has had some issues with fraud that they seem to be pretty confident as an industry. Wide issue with fraudsters going after the gas pumps because they -- there hasn't been a non-EMV compliant and -- but it doesn't seem like you're seeing any of that at all in your business?

[Ronald F. Clarke:]

Yes. Our -- we keep track of both credit losses in total and fraud as a piece of our credit losses. And fraud has declined '16 over '15 and this year year-to-date versus the prior year. So our fraud is down. But we've gone crazy, Bob, in terms of what we call drag, net authorization controls basically to find, identify and shut off fraudulent stuff because we had our own share of problems 4 and 5 years ago. So I'd say that we've worked that pretty hard. And year-to-date, I think our total fraud losses are in the $4 million or $5 million range. So it's pretty low.

[Eric R. Dey:]

It's about $2.5 million year-to-date.

[Ronald F. Clarke:]

Year-to-date. Annualized, call it $5 million. It's not a big issue for us.

[Robert Napoli:]

Not seeing it. So I guess, it was good to have problems a few years ago.

[Ronald F. Clarke:]

Yes. We work on so many things, but that's one we've worked on, yes.

[Robert Napoli:]

And then last question, and I'd turn it over. I mean, great job on -- I really appreciate laying out the changes in the EPS guidance. So just the changes in the revenue guidance from keeping SVS, selling Nextraq and buying Cambridge, what was the net effect on revenue -- the revenue guidance?

[Eric R. Dey:]

I've got to go back and look at that, Bob. Sorry. I have to get back to you on that. I just don't have it handy. I'd have to add it up.

[Ronald F. Clarke:]

I have it here in front of me. It's kind of $5 million to $10 million favorable in the second half.

[Operator:]

Our next question comes from the line of Tien-tsin Huang with JPMorgan.

[Tien-Tsin Huang:]

Just wanted to -- I guess, I want to come -- keep coming back to this -- the soft spot you guys called out. I just want to make sure the second half organic growth rate, if we were to strip those 2 issues out, it would be closer to 11% to 13% for the second half run rate of organic growth, 11% to 13%?

[Ronald F. Clarke:]

Yes. We gave 10%, Tien-tsin, right in guidance. We did, I think, 10% in the first quarter. We reported 9%. I think I said 8% to 9% in Q3 and 4 and that, for the question earlier, had call it 2 to 3 points this quarter and maybe 3 to 4 in the next quarter. So it would have been, call it, 11-ish, fuel price being 50% of the business, call it 11%.

[Tien-Tsin Huang:]

Got it. Okay, yes, so you wouldn't have the acceleration if it were not for that. So just I know -- I get there's no quick fix. It's happened, you said it plateaued, but it sounds like you want to get that back up. Is there a plan in place? Are you going to put more sales up or try and get that portfolio back up?

[Ronald F. Clarke:]

Yes. I mean, obviously, it's a great product when you don't scoop up the history on clients. So the product is a good product, which we've obviously sold a lot of until the thing had good satisfaction. So yes, we just -- we want to really make sure all is good, like everything is good. I want to see a little bit more of the tail here before we redirect a bunch of resources back at it. So I'd say we're still a little bit in pause, maybe another month or 2. I want to see a little bit more data. But it's clearly our best U.S. fuel card product, so we will be back selling it. The question is just is it 1 month or 2 or 3 from now.

[Tien-Tsin Huang:]

Okay. Just as my final question just thinking about new sales, it sounds like retention has been stable. But -- so your expectation given what you've heard -- we learned today around new sales for the year and then retention for the year, not just 2Q, has that changed, Ron?

[Ronald F. Clarke:]

I think in our forecast, we reported 7% global sales growth over the prior year. I would say 10% to 12% would be the number if we hadn't gotten distracted, right, calling customers back, this thing. So I would assume that, that will rebound, will be double-digit growth of sales in the second half. And we haven't done all the math yet. There'll be some flow-through from this onetime attrition, so 1 portfolio, which I think, Eric, was 3% to 4% of the global company was the file we converted. So anyway, whatever that onetime loss is, we'll see some of that trickle into Q3 and Q4, that 91.5%. But again, that's in our -- kind of in the numbers, which -- I don't want to make this a depressing call talking about IT. But just to remind everybody, it clearly suggests rest of world, rest of FLEETCOR is doing good to be able to continue to kind of beat what we set out and beat the profit number. That means kind of all things we didn't convert are doing well.

[Operator:]

Our next question comes from the line of James Schneider with Goldman Sachs.

[James Schneider:]

I was wondering if you could maybe say a little bit more about the European partner opportunities you touched on, on the call earlier, Ron. Do you -- what's your confidence interval that one or both of those opportunities will convert before year-end and how do you like your chances?

[Ronald F. Clarke:]

Jim, always -- I've been wrong enough on this. It's hard to handicap again. But the update I try to provide is that the time line to a decision that gets reported back to us has narrowed considerably. So we expect in both cases to hear something imminently. And then I'd say, like always, we're optimists that we like our chances. So we continue to tell you that we're in the hunt for things. There are people looking at them, people studying them and people telling us they're going to decide. And so we're kind of reporting back that we expect to hear something soon.

[James Schneider:]

That's helpful. And then I apologize if I missed this before. But obviously, same-store sales started to improve a little bit, and that's a good thing. Do you feel like those markets, especially transport energy and the like, are in a position where they can actually continue to improve from here? Or do you feel that's just too tough a call based on what you see today?

[Ronald F. Clarke:]

Yes. I think that the visibility we have is limited, right? We would have called out that we see the thing turning. What I would say is there's a few industries that are clear, right? We've grown over the oil and gas thing, same thing on the transport, lodging business, the railroad thing, we're on the other side of that. It looks like, again, the Brazil thing is stable to move a bit. So I'd say that it feels like a few of the pieces that were on the wrong side of this thing have moved to the correct side. But with as many different places and things we're in, I can't say that we have a great forward view of it. We kind of planned it flat is kind of what's in our forecast for the second half.

[Operator:]

Thank you. This concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments.

[Eric R. Dey:]

I want to thank everybody for participating in the call today, and we look forward to further dialogue. Thank you very much.

[Ronald F. Clarke:]

Thanks, guys. I appreciate it.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.