Corpay, Inc.
Q4 2015 Earnings Call Transcript

Published: 4 Feb 2016

[Operator:]

Greetings, and welcome to the FleetCor Technologies' Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] Also as a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Eric Dey, CFO. Thank you. You may now begin.

[Eric R. Dey:]

Good afternoon, everyone, and thank you for joining us today. By now, everyone should have access to our fourth 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 2016 guidance on a non-GAAP basis.

[Finally, before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. This may include forward-looking statements about our 2016 guidance, new products and fee initiatives and expectations regarding business development and acquisitions. 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 that could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today's press release. Others are described in our annual report on Form 10-K. These documents are available on our website, as previously discussed, and at www.sec.gov.:]

[With our disclosures 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. And good afternoon, everyone, and thanks for joining today. Up front here, I'll plan to cover 3 subjects

[Okay. So onto the quarter. We reported Q4 revenue of $431 million. That's up 14% and cash EPS of $1.70, up 22%, so 14% top line, 22% bottom line. Q4 presented quite a challenging macro environment for us. You could say we hit the trifecta of low fuel prices, weak FX and even unfavorable fuel spreads versus Q4 2014.:]

[Combined, these factors resulted in approximately a $56 million headwind to revenue in the quarter and a $0.36 headwind to cash EPS in the quarter.:]

[And if these 3 things were not enough, our same-store sales were a bit weak in the quarter as well due to the U.S. railroad and U.S. oil-related industries being quite soft, along with the ongoing weakness in both Russia and Brazil. So quite a bit of environmental challenge in Q4.:]

[If you were to look at FleetCor in the quarter on a like-for-like or constant basis, we actually had a very good quarter. Our organic adjusted revenue growth was approximately 10% for the quarter. Revenue fundamentals quite sound underneath all this macro noise. And again, with $0.36 of cash EPS headwind, instead of reporting 22% profit growth, we would have reported 48% profit growth in a constant environment. So look, the point again is quite healthy underneath all the noise.:]

[So in terms of themes for the quarter, let me start with Comdata. So Comdata contributed quite a bit of incremental revenue in Q4, given the anniversary date was mid-quarter. And inside of that, our Comdata trucking fuel card business was up 12%, so 12% for the quarter, which is really a terrific exit rate for that business.:]

[Our U.S. MasterCard business continued to perform exceptionally well in the quarter, up 43% on a constant fuel price. Pac Pride, one of our newest acquisitions, doubled revenue in the quarter on the strength of an extended network card. We got incremental revenue from the Shell Europe outsourcing initiative, entering 3 new European markets in the quarter. And then lastly, we did have some tax favorability, which resulted in a lower Q4 tax rate. Eric will expand on the details in his section.:]

[So look, all in all, a pretty good Q4 performance.:]

[Okay. Let me transition now over to full year 2015. So we reported revenue of $1.7 billion, up 42% and full year cash EPS of $6.30, up 22% versus 2014. So that makes 5 years in a row that FleetCor, since it went public in 2010, has reported 20% plus annual profit growth, so quite pleased with that.:]

[So in terms of 2015, to say that it was a crazy macro environment would be an understatement, and the fact that we printed 22% profit growth for the full year, that's quite encouraging.:]

[If you were to look at full year 2015 on a like-for-like basis, a constant basis, we would have reported $1.08 of incremental cash EPS. So instead of our reported number of $6.30, you're looking at a number of $7.38, which would be a 43% profit growth over 2014. You'd have the same story on the revenue side. Underneath all this macro headwind, our businesses continue to meet our organic adjusted revenue growth target of 10%, which, again, they did for 2015, excluding SVS. So look, that continues to position the company quite well going forward.:]

[So beyond the numbers for 2015, we did make a lot of strategic progress in the year. So first off, Comdata. We progressed in terms of integration. We installed 2 new executives to run the 2 main businesses. And obviously, we're off to a good start, executing against our growth plans. The trucking business, I mentioned a bit ago, up 12% in the quarter and corporate payments business up 13% in the quarter, excluding health care. So pleased with Comdata, first year.:]

[Our second area of progress in '15 was with our partners. We're delighted that we renewed our BP relationship for a second time. We also advanced proof of our European outsourcing capability by implementing 5 new European markets successfully for Shell. We're hopeful that, that builds further trust for other major oils.:]

[Many of our growth businesses kept on going in 2015. Our U.S. MasterCard business was up 38% on a constant fuel price for the full year. CLC up 13%, despite some big time railroad slowdowns in the second half of the year.:]

[Our Pac Pride business revenue up about 50% in 2015 and Efectivale, our Mexico business, up 14% in local currency. So again, a number of our growth businesses continuing to do well. In terms of stability, we're quite pleased with 3 of our businesses that are in difficult markets. So our Russia business flat in local currency, despite that economy down. Our Brazil business flat in local currency, with that market down. And our Czech business flat in local currency, which is a bit of a turnaround for that business. So although it may not seem it, good news in terms of 3 businesses holding their own against the prior year in pretty weak economies.:]

[And lastly, we're pleased that we did some new things in 2015. We launched our AllStar One card, which is our new U.K. chip card. We converted about half of all of our clients to that product by the end of '15, so good progress there. We got our European universal card finally live in Germany and continued to work out the bugs of that product. We launched our new Comdata Hotel card program for trucking clients, which uses the CLC hotel network. In the first month, we signed up about 100 clients, representing about $1 million of annualized revenue, so good start. And then finally, we launched Uber in the spring of 2015 and that has been really a great success.:]

[So look, all in all, 2015, a very solid financial year, profits up over 20% and a decent amount of strategic progress accomplished.:]

[Okay, so last, let me transition over to our 2016 outlook. Today, we're providing 2016 guidance of $1.755 billion in revenue at the midpoint and $6.50 in cash EPS at the midpoint.:]

[The story of 2016 again looks like a macro environment story. Each of the key macro variables that affect us, fuel price, FX and interest rates are all in a worse place than they were for the full year or the average for 2015. And if you aggregate these environmental factors, we're estimating approximately $100 million revenue headwind in 2016 versus a constant '15 and approximately a $0.70 cash EPS headwind in '16 versus a constant '15. So again, a lot of challenge setting up here. If you were to look at our guidance this year on a constant or like-for-like basis, we're still planning adjusted revenue growth of 10% for full year 2016. And again, on a constant basis, cash EPS would be $7.20, not the $6.50 in a constant environment. So look, the good news in all of this is that we continue to power through a very negative environment for 2 years in a row and that, underneath all this macro noise, we want to reiterate that our growth fundamentals are quite sound.:]

[So with that, let me turn the call back over to Eric. He'll provide some additional information on the quarter, the year and our outlook. Eric?:]

[Eric R. Dey:]

Thank you, Ron. For the fourth quarter of 2015, we reported revenue of $430.6 million, an increase of 14% from the fourth quarter of 2014. The revenue from our North American segment increased 27.1% to $313.6 million from $246.7 million in the fourth quarter of 2014.

[Included in the fourth quarter results was the impact of Comdata, which was acquired on November 14, 2014. Revenue from our International segment decreased 10% to $117 million from $129.9 million in the fourth quarter of 2014.:]

[For the fourth quarter of 2015, GAAP net income decreased 52% to $52.8 million or $0.56 per diluted share from $109.5 million or $1.21 per diluted share in the fourth quarter of 2014.:]

[Included in GAAP net income for the fourth quarter of 2015 was a $40 million noncash impairment charge related to our minority investment in Masternaut and a $34 million increase in noncash stock compensation expense compared to 2014.:]

[The other financial metrics that we routinely use are adjusted revenues and adjusted net income, which are sometimes also referred to as cash net income or cash EPS. Adjusted revenues equal our GAAP revenues less merchant commissions. We use adjusted revenues as a basis to evaluate the company's revenues, net of the commissions that are paid to merchants, who participate in certain card programs. We prepare adjusted net income to eliminate the effects of noncash items that we do not consider indicative of our core operating performance. 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 fourth quarter of 2015 increased 17% to $403.1 million compared to $343.4 million in the fourth quarter of 2014.:]

[Adjusted net income for the fourth quarter of 2015 increased 27% to $160.2 million or $1.70 per diluted share compared to $125.8 million or $1.39 per diluted share in the fourth quarter of 2014.:]

[Elements of the macroeconomic environment had a significant impact on our results in the fourth quarter, specifically, market fuel spread margins, fuel prices and foreign exchange rates. In the aggregate, we estimated that these macroeconomic items negatively impacted our business in the fourth quarter of 2014 (sic)[2015]:]

[versus the fourth quarter of 2014 by approximately $56 million in adjusted revenue or approximately $0.36 in adjusted net income per diluted share.:]

[In addition, we are also seeing some same-store sales softness in the quarter. We estimate about 2% to 3% globally. We believe the softness is due primarily to the U.S. railroad and oil-related industries as you would expect, along with ongoing weakness in both Russia and Brazil.:]

[On a constant currency fuel price and market spread margin basis, we estimate that we would have reported approximately $2.06 in adjusted net income per diluted share in the fourth quarter of 2015 compared to $1.39 in the fourth quarter of 2014 or a growth rate of approximately 48%.:]

[Changes in foreign exchange rates were unfavorable in all geographies for the quarter, and overall, we believe negatively impacted adjusted revenues during the quarter by approximately $20 million.:]

[Fuel prices and fuel spread margins also decreased during the quarter versus prior year. And although we cannot precisely calculate the impact of these changes, we believe they negatively impacted adjusted revenues by approximately $36 million.:]

[To better understand the organic growth for the quarter, we calculated revenues using constant currency, fuel price and market spread margins. Based on these criteria, we estimate that we would have reported an approximately 9% organic growth rate for the quarter, excluding the SVS business, and approximately 10% on a consolidated basis.:]

[For the fourth quarter of 2015, transaction volumes increased 50% to 568 million transactions compared to 380 million transactions in the fourth quarter of 2014.:]

[The increase in total transactions was due primarily to the acquisition of Comdata on November 14, 2014, and also organic growth in our businesses. Excluding the impact of Comdata, our transaction volumes were 95.4 million in the fourth quarter of 2015 compared to 91.8 million transactions in the fourth quarter of 2014 or a growth rate of approximately 3.9%.:]

[North America segment transactions grew 58%, driven primarily by the acquisition of Comdata and also organic growth in our U.S. businesses. Transaction volumes in our International segment were down approximately 5.8% to 45.8 million transactions. Transaction volumes in the International segment were impacted primarily by market softness in some of the international businesses.:]

[For a more meaningful discussion on revenue per transaction, we will exclude the impact of the SVS business, which had approximately 429 million transactions in the quarter at a very low revenue per transaction.:]

[Revenue per transaction for the fourth quarter of 2015, excluding the SVS business, decreased 15.2% to $2.79 from $3.29 in the fourth quarter of 2014.:]

[Revenue per transaction can vary based on the geography, the relevant merchant and customer relationship, the payment product utilized and the types of products and services purchased.:]

[The revenue mix was influenced by our acquisitions, organic growth in the business and fluctuations in the macroeconomic environment, as previously discussed.:]

[Revenue per transaction, excluding SVS, decreased approximately 23.1% in North America due primarily to lower fuel prices and fuel spreads during the quarter versus the prior year quarter. In the International segment, revenue per transaction decreased 4.5% due primarily to the unfavorable impact of foreign exchange rates across all of our geographies. This unfavorable impact was partially offset by organic revenue growth in several lines of business.:]

[Now let's shift over and discuss some of the other drivers of our fourth quarter performance.:]

[For our North American segment, most of our lines of business performed well. On a constant currency, fuel spread and fuel price basis, we estimate that the organic growth rate in the quarter was approximately 12%, excluding the impact of the Comdata acquisition. Some of the positive drivers in the North America revenue during the quarter were similar to the last several quarters, including the exceptional performance of our MasterCard product, which had estimated revenue growth of approximately 43% over the fourth quarter of 2014 measured in constant fuel price. The growth in MasterCard was driven by increases in both transactions and revenue per transaction measured on a constant fuel price basis.:]

[CLC had another solid quarter with 8% revenue growth over the fourth quarter of 2014. This revenue growth was driven primarily by increases in our CheckINN Direct product, which targets smaller accounts. Our Comdata business, excluding SVS, performed well in the quarter and had an organic growth rate of approximately 8% on a constant fuel price basis versus prior year. And as I've mentioned in prior quarters, the Comdata organic growth rate in 2015 was impacted by lower RFID sales in our trucking business and higher opt-out rates in the health care segment. International segment revenue was down approximately 10% in the fourth quarter of 2015 versus the fourth quarter of 2014. This decrease was driven primarily by unfavorable foreign exchange rates in all geographies, which negatively impacted adjusted revenues by approximately $20 million in the quarter versus last year. On a constant currency and fuel price basis, organic growth was approximately 7% for the quarter.:]

[Some of the international highlights for the quarter include the continued conversion of the Shell small business portfolio. We are now in a total of 7 markets with a plan to convert the remainder of the markets in 2016. Our Mexico business continued to perform well and posted double-digit gains. And on the downside, economies in Brazil and Russia continue to struggle and are impacting volumes in those markets.:]

[Now moving down the income statement. Total operating expenses for the fourth quarter were $284.5 million compared to $204.1 million in the fourth quarter of 2014, an increase of 39%. As a percentage of total revenues, operating expenses increased to 66.1% of revenue compared to 54.2% in the fourth quarter of 2014, 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 fourth quarter of 2015 operating expense were additional operating expenses and significant additional amortization expense related to the acquisition of Comdata. In addition, noncash-stock compensation included in general and administrative expense was $45.7 million in the fourth quarter of 2015 compared to only $11.4 million in the fourth quarter last year.:]

[Excluding the impact of the additional noncash stock compensation expense, we estimate that operating expenses as a percentage of revenue would have been approximately 58%.:]

[Also to remind everyone, we booked approximately $26 million of deal-related expenses in the fourth quarter of 2014. Also included in operating expense for the fourth quarter of 2014 was an approximately $29 million gain in unusual items, reflecting a decline in amounts for contingent consideration and tax indemnification for the company's 2013 acquisitions of DB and VB in Brazil.:]

[Credit losses were $6.3 million for the quarter or approximately 3 basis points compared to $6.3 million or 13 basis points in the fourth quarter of 2014. The 10 basis point decrease in bad debt was due primarily to the inclusion of Comdata in the quarter, which had bad debt as a percentage of its billed revenue significantly below the Fleetcor average.:]

[Depreciation and amortization expense increased 27% to $48 million in the fourth quarter of 2015 from $37.8 million in the fourth quarter of 2014. The increase is primarily due to amortization of intangible assets related to the Comdata acquisition. Also, the company booked a loss of $3.7 million in the fourth quarter of 2015 related to our minority investment in Masternaut compared to a loss of $4.9 million in the fourth quarter of 2014.:]

[We regularly evaluate our investments, which are not carried at fair value for other than temporary impairment in accordance with GAAP. As part of the review, we determined that the performance improvement initiatives implemented in Masternaut will take longer to implement than we originally projected. As a result, we have recorded a $40 million noncash impairment charge in the equity investment line in the income statement.:]

[Interest expense increased 24.9% to $16.5 million in the fourth quarter of 2015 from $13.2 million in the fourth quarter of 2014. The increase in interest expense was due primarily to additional borrowings to finance the Comdata acquisition.:]

[Our effective tax rate for the fourth quarter of 2015 was 38.4% compared to 21.9% for the fourth quarter of 2014. However, the noncash impairment charge resulted in a reduction in basis in Masternaut for book purposes, but not tax purposes. Although this temporary book/tax basis difference resulted in the company increasing its deferred tax asset related to its equity investment in Masternaut, the company also increased its valuation allowance against the deferred tax asset. Excluding this noncash item, our tax rate in the fourth quarter of 2015 would've been 26.2%.:]

[Also included in the fourth quarter was an approximate $6 million favorable adjustment, primarily related to the reversal of prior year uncertain tax positions due to the statute of limitations expiring, a reduction in Comdata state tax rate due to Comdata being included in the company's state tax structure and the impact of a reduction in the U.K. statutory tax rate in 2017 through 2020.:]

[The lower statutory rates in the U.K. resulted in a reduction to the company's net deferred tax liabilities related to its U.K. subsidiaries. Excluding the impacts of these unusual items, our income tax rate in the fourth quarter would have been approximately 30.6%.:]

[To remind everyone, the 21.9% tax rate in the fourth quarter of 2014 was due primarily to a $9.5 million reversal of a deferred tax liability established in conjunction with the DB acquisition in Brazil as a result of the completion of some entity consolidations.:]

[Now turning to the balance sheet. We ended the quarter with approximately $614.6 million in total cash, approximately $167.5 million is restricted and are primarily customer deposits.:]

[As of December 31, 2015, we had approximately $1.9 billion outstanding on our term A loan, $240 million outstanding on our term B loan and approximately $160 million drawn on our revolver, leaving approximately $875 million of undrawn availability.:]

[We also had approximately $614 million borrowed against our securitization facility. As of December 31, 2015, our leverage ratio was 2.45x EBITDA, down from 2.49x in the third quarter, which is well below our covenant level of 4.25x EBITDA.:]

[And finally, we are not a capital intensive business and we spent only $12.3 million on CapEx during the fourth quarter of 2015.:]

[On February 4, 2016, our Board of Directors has authorized a repurchase of up to $500 million of FleetCor's common stock for an 18-month period ending August 1, 2017. The shares may be purchased from time to time in the open market, in privately negotiated transactions or in other manners as permitted by federal securities laws and other legal requirements.:]

[The timing, manner, price and amount of any repurchases will be determined by FleetCor in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. There is no guarantee as to the number of shares that will be repurchased. And the stock repurchase program may be extended, suspended or discontinued at any time without notice at FleetCor's discretion. The repurchase is expected to be funded by available cash flow from the business and working capital.:]

[Now onto our outlook for 2016. For 2016, we again have a number of macroeconomic headwinds affecting our business, primarily foreign exchange rates, fuel prices and spreads. We are estimating that foreign exchange rates will negatively impact revenue by approximately $40 million compared to the 2015 average, and the absolute price of fuel is expected to be a headwind to revenue of approximately $45 million versus the 2015 average. In addition, we believe market spreads will be better than historic levels, but contribute approximately $15 million less revenue than 2015 spreads. In aggregate, we believe the macroeconomic environment creates approximately a $100 million revenue headwind and approximately $0.70 cash EPS headwind versus the 2015 averages.:]

[That being said, we expect total revenues to be between $1,730,000,000 and $1,780,000,000; adjusted net income to be between $605 million and $625 million; adjusted net income per diluted share to be between $6.40 and $6.60 or $6.50 at the midpoint. We don't know how the environment will actually play out in 2016, but if it improves this year, some of the headwind may come back as a tailwind.:]

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

Weighted fuel price equal to $1.91 per gallon average for 2016 compared to $2.56 per gallon average in 2015, a reduction of approximately 25%; market spreads returning to more historical levels for 2016, but down approximately $15 million versus 2015. Foreign exchange rates equal to the 7-day average ended January 15, 2016. The SVS business is retained for 2016. Continued weakness in the company's Russian and Brazilian businesses, a full-year tax rate of 32.2%, fully diluted shares outstanding of 94.7 million shares and as always, no impact related to acquisitions or material new partnership agreements not already disclosed.

[For those of you that are looking for guidance for the quarter, I want to remind everyone that our business has some seasonality and that typically, the first quarter is the lowest in terms of both revenue and profit. First quarter seasonality is impacted by weather, holidays in the U.S., Christmas being celebrated in Russia in January and lower business levels in Brazil due to the summer break and the carnival celebration occurs in the first quarter.:]

[With that said, we are expecting our first quarter adjusted net income per diluted share to be between $1.47 and $1.53 or $1.50 at the midpoint. Additionally, our volumes build throughout the year and our new asset initiatives gain momentum throughout the year resulting in higher earnings per share in the second through fourth quarters.:]

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

[Operator:]

[Operator Instructions] Our first question comes from the line of Jim Schneider from Goldman Sachs.

[James Schneider:]

I was wondering if you can maybe comment on Europe in general, particularly your progress with Shell and some of the proof points you demonstrated there. And then onto the broader question of the environment for more outsourcing deals in Europe. Now that, that proof point is established, where do you think the oil companies' heads are at, given where -- the progress you've made with Shell? And what do you think we can expect over the next 12 months?

[Ronald F. Clarke:]

It's a good question, Jim. Thank god there was a question, we didn't think there would be any. So we entered 2 new markets in Q4. So what are we now, Eric?

[Eric R. Dey:]

Seven.

[Ronald F. Clarke:]

Seven, Jim, in total. So another 4 or 5 this year. And it's going well so hopefully, it builds some confidence basically that we are reliable and deliver on what we say. So we're hopeful that their confidence will grow. There are, I've mentioned before, a couple of active RFIs over there, so there are people sawing the wood here.

[James Schneider:]

That's helpful. And then maybe as a follow-up, if you could just maybe comment more broadly on the M&A environment, what you're seeing out there in terms of prices of assets, whether more things are becoming available and whether you're more likely to take a look at something in more of a distressed emerging market versus something more like in the U.S., for example.

[Ronald F. Clarke:]

Yes, I'd characterize it as active, I'd say. We're probably as busy now as I can recall. I'd say prices are probably high but getting a little more realism in the last few months with the market trending down. But again, we look at things kind of on a forward year, Jim, a year-1 basis. And so that's more our focus than trailing. Yes, so we're busy and we're late stages on a few deals now.

[James Schneider:]

And just one quick follow-up, if I could. It appears that the equity market seems to be looking rather unfavorably on companies that are doing pretty high levels of leverage. So is that coloring your view in terms of the size of deal you want to do?

[Ronald F. Clarke:]

Yes, I think we're in the same place we've been. We said, I think, repeatedly, we want to run a company in and around 3x. And I think Eric just laid out we were what, 2.45x on a trailing basis. So we could spend $1 billion and basically still be 3x or under. So we're feeling good.

[Operator:]

Our next question comes from the line of Sanjay Sakhrani from KBW.

[Sanjay Sakhrani:]

I guess I had a question on the same-store sales numbers. Obviously, a pretty meaningful downshift per your comments. Could you just talk about the risk it could get worse and kind of what's baked into your guidance?

[Eric R. Dey:]

Sanjay, this is Eric. What I called out is if you look at our same-store sales globally, we saw softness in the 2% to 3% range. And that softness is kind of centered in a couple of areas. One, from a domestic perspective, it really is those accounts that do more business in the oil and gas area. As you would expect, a lot of businesses have cut back in that area and that's reflected in our volumes, with accounts that are servicing that sector. We've seen a little bit of negative momentum in the railroad sector in the United States, particularly related to our CLC business. So there's been some softness kind of in the fourth quarter. And then mainly internationally, it's in the economies you would think of. It's primarily Brazil, which has seen a pretty dramatic softening kind of in same-store sales, and then to a lesser degree, in Russia. And then we've got -- the remainder of our businesses are pretty good shape, either kind of flat or up a little bit.

[Sanjay Sakhrani:]

So in your guidance, are you assuming that conditions persist as is?

[Eric R. Dey:]

That's correct.

[Sanjay Sakhrani:]

Okay. A second question just on SBS, understanding for guidance purposes, you guys are leaving it in. But is that how we should think about how you are thinking about that asset strategically? Or are there still options on the table?

[Ronald F. Clarke:]

Yes, I'd say we're leaving it in and we are still sawing wood on the alternative that I mentioned the last time. We had a bit of a snag on something that we've cleared, so I think we're closer, finally, to finishing.

[Sanjay Sakhrani:]

Okay. One final question, Eric, maybe you can help me with, the spreads piece where you've basically assumed a downshift. If gas prices stabilize from here on out, is it fair that there would be no impact going into next year? Or is there still an impact in terms of normalization of the spreads?

[Ronald F. Clarke:]

Yes, we look at it from a year-over-year basis and spreads have been running at an abnormally high level. There's always a possibility they could continue to run at an abnormally high level. We just assumed that they kind of have gone back to more of a normal level in 2016. So if fuel prices do normalize, I mean, it's -- obviously, it's kind of unpredictable exactly where it's going to go. We think they're going to remain higher than the long-term historical average but kind of a little below where it ran in 2015.

[Eric R. Dey:]

But again, our guidance is assuming that we're getting pretty low and again, spreads widen when absolute fuel prices drop, and so they dropped a ton in the second half of '15. So we're assuming that we're mostly down and so spreads would be, we think, more normal.

[Operator:]

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

[David Togut:]

Nice to see you hit the low teens exit rate on Comdata. I know you wanted to clear 10% in the fourth quarter, so very good to see that. I'm wondering if this is a sustainable growth rate for this business or is there room for some acceleration from where we are?

[Eric R. Dey:]

David, yes, I'd say we're staring at our '16 plans in front of us and the 2 main Comdata businesses are planned to be high double digits, so closing in on 20% for 2016. So I'd say that we've put some of the things in this year that we had hoped for, and we got some evidence of it exiting Q4, and we're planning good growth for both this year. So we're pretty pleased.

[David Togut:]

And then in connection with that, Ron, is there still room for incremental cost take out? Or are you at the run rate that you expect to sustain?

[Ronald F. Clarke:]

Yes, we've -- that's a good question. We've taken some additional costs but we've kind of poured it back in, David, on sales. We've put another $3 million or $4 million incremental into corporate payments and sales and we've put another, I don't know, 20, 30 people additional in the plans in the trucking business. So some of the costs we did take out, we put in with good calories. I'd say the main thing that's left that's probably not this year but might be next year is IT. We've got some plans to convert some of the Comdata businesses onto our global platform and have a bit of a variable cost structure with the supplier there. So if we're successful in kind of moving some of that business off their platform, we will see a pretty substantial IT cost savings. But probably not this year, it's probably a '17 number.

[David Togut:]

Got it. And then, the 43% growth in direct MasterCard revenue was pretty extraordinary in this environment. How should we think about the growth rate in this product for 2016?

[Eric R. Dey:]

Again, I think we say this to you all the time, it's -- a lot of it's a function of how much we invest. We're investing another $20 million plus in sales in our '16 plan, so the volumes again continue to be great. The mix keeps getting better because we're getting down market with that product, so our rates are better on smaller accounts. And we did put some fees in because the clients are enjoying a much lower absolute bill right from us. So I think we continue to say, David, it's not opportunity limited, it's really investment and execution limited.

[David Togut:]

Got it. Quick final question. You're looking at capital allocation big picture, you've announced a $500 million buyback. I think the last time you bought back stock was beginning of '13. You've got potentially a big acquisition on the table. And then SBS, you're trying to sell. How do you look at this altogether? And can you give us a sense of how you evaluate buyback versus acquisition at current prices?

[Ronald F. Clarke:]

I mean, the first thing I'd say is we've gotten into a good place. We like, again, where the leverage is now post Comdata would be one. Two, we're a buyer, at this price, at this multiple, an 18x or 19x price on current year earnings feels low to us, below a 1 tag on a 20% plus grower. So we like this price as a buyer. And I'd say, three, the math that we do says we can do both, that we can basically buy back stock with our cash flow and fund, let's say, $1 billion this year and still be kind of around the 3x number. And so when we concluded that math, we said, at this price, we're going to do both. But I said this repeatedly, if we get into a place where there's a choice and we have a deal that we like, we're picking the deal. And the reason is because we always think we can do more with an asset over a longer cycle. So if forced to decide between the 2, that's what we'd pick. But fortunately, we're kind of not forced to decide, so our plan is to chase both.

[Operator:]

Our next question comes from Tien-tsin Huang from JPMorgan.

[Tien-Tsin Huang:]

Just wanted to clarify, I guess, the walk to the $7.20 on the constant macro. I guess that's 14% growth versus the $6.30. So what would it take to get to the 20-plus percent? Would you need some better same-store performance? Is that the key difference?

[Ronald F. Clarke:]

Yes, I think, Tien-tsin, we've said kind of the organic model is kind of 10% and 14% or 10% and 15% given the margins that the business has gotten to now. So to kind of fill the boat with the other 5-plus percent, we either get some kind of big partner deals or we buy. And so again, we've said before, if we're generating, what is it, $600 million in free cash flow?

[Eric R. Dey:]

Yes.

[Ronald F. Clarke:]

And again, you buy that at 10x trailing and you improve it like we do, that adds the incremental earnings to basically get us above 20%. So the goal over 1-, 2-, 3-year cycle is to do both things, keep growing the top at 10% and organically at 14% or 15% and use the cash flow to buy earnings that we can improve that keep the thing going above 20%. And I think the good news, despite all the would have, could have speech we gave about the macro, just to help you guys do the math, is the businesses are still growing 10%. So when we do the estimating for the last couple of years, we're still growing the collective set of businesses 10% on the top and we've built a plan for '16 that we'd like to do it again. And so I think we're comfortable that the organic machine is basically working, and we need to pull the trigger on deals that we like to deliver the growth that we promised.

[Tien-Tsin Huang:]

Right. No, look, you're executing well. I know it's a tough macro, certainly stuff we haven't seen in a long time.

[Ronald F. Clarke:]

I know.

[Tien-Tsin Huang:]

But maybe a second build-up question just to high -- you talked about the high growth in the fourth quarter in 2015 if you adjust for the macro, all helpful. But how much of that high growth do you think is fueled by maybe actions you took because of a lower fuel environment, right, because you're trying to fight for growth as well. Is there a way to quantify that Eric and Ron? Do you follow my question?

[Eric R. Dey:]

Yes, I got it, Tien-tsin. I mean, certainly, there is a mix of the 2, right? I mean, if you look at kind of our transaction growth in the quarter, we grew transactions a shade under kind of 4%, that's causing some of the growth. And obviously, we are investing in those products that are higher than the line average revenue per transaction, so there's certainly a bunch of mix kind of in there as well as we normally have. And there certainly is some favorability associated with some of the pricing actions that we've taken around the world. I don't have an exact quantification of that, but there's certainly some of it in there.

[Tien-Tsin Huang:]

Got you.

[Ronald F. Clarke:]

Yes, and again, Tien-tsin, some of it would be feathered right during the year. So when you think about things we did, the planet fell apart about the same time last year, kind of Q4 and the beginning of '15. So I'd say that -- those set of actions were spread right during the year. So there's more in the exit rate than in the full year, so we wouldn't have much of an issue. And then b, we clearly have other things in the kitchen that we've worked on that create more growth in earnings like the Pac Pride thing I referenced. Our revenues are double, think about it, double in the quarter. And we bought that thing, what, 1.5 years ago?

[Eric R. Dey:]

1.5 years ago, yes.

[Ronald F. Clarke:]

So there's a number of those things like the Comdata hotel card, there's things in every business that are kind of adding money to stay at the 10%. So I'd say that the outlook is pretty healthy, that we're kind of planning just a good tran [ph] growth, some good new product growth, some incremental sales investment and probably less rate action here in '16 than in prior years.

[Tien-Tsin Huang:]

Got it. No, that's great to hear. Right, because Pac Pride and MasterCard was running hotter in the fourth than the full. I don't want to hog the call, but just one more. Just on the -- I don't know, is there a way to comment, I know there's a lot of press around the Brazil towing [ph] sort of asset. Is there anything you can say about that?

[Ronald F. Clarke:]

Not really, other than we're always looking, as you know, always, always looking.

[Operator:]

The next question is from Ashish Sabadra from Deutsche Bank.

[Ashish Sabadra:]

My question was around the international business. So you talked about the puts and takes there, Brazil and Russia still being challenging, but Mexico and U.K. are doing well. We saw the revenue growth improve there from 4% in third quarter to 7% in the fourth quarter. So can you help us understand what's driving that growth and how should I -- how should we think about the international growth on a constant currency basis in fiscal year '16?

[Eric R. Dey:]

Ashish, this is Eric. Yes, I mean the numbers kind of bounce around a little bit. We had a reasonably good quarter internationally. I mean all things considered, Ron called a couple of things out on the call. As an example, our U.K. business did perform reasonably well. Our Epyx business that we bought, now a couple years ago, we've implemented. We've added money into sales and marketing function there. We're starting to see some progress in that business. We've added a bunch of revenue in euroShell. We've added 3 or 4 new markets this year. Don't forget, Shell also awarded us kind of some cross-border business there, as well. So we're seeing a lot of incremental revenue associated with that kind of win. And then unfortunately, on the downside, it's a few things that kind of Ron called out. Brazil is softening but relatively flat, Czech Republic is flat and Russia surprisingly is relatively flat as well. So it's a bit of a mixed bag, some things are doing kind of well and a couple of things are kind of flat.

[Ronald F. Clarke:]

Yes, let me just add on to that. I described it to you as kind of the international is a tale of 2 cities. So there's the trouble places like Brazil and Russia, and for us even, Czech, which are basically flat, as I said, in local currency and kind of out looking flat. And then the rest of the international like the U.K., the Europe, outsourcing thing, Mexico, Australia, those businesses are all up, some of them are way up. So I think it's the lift of the second set of things that are carrying the things that are kind of flat.

[Eric R. Dey:]

Right. And if you can turn those economies around for us, we'd be appreciative.

[Ashish Sabadra:]

No, that's absolutely -- no, that's good to know. And then on CLC, that did slow down in the fourth quarter and again, you called out some headwinds there. But as you think about cross-selling CLC into the Comdata and the initial success that you've had there, what are your thoughts on acceleration in that particular part of the business?

[Ronald F. Clarke:]

Yes, I'd say, the first comment, we're quite surprised. The railroad business has always been a pretty big piece of CLC from kind of way back in the day, a big piece of the volume. And I'd say it's been for years, like way before we bought it, rock solid, steady as she goes, up a few percent, bedrock kind of business. And it really took a hit, kind of starting in the second half, so it was again a big piece of the business. So that, I'd say, is a little surprising. I'd say going forward, we like the growth in the CheckINN Direct, which is obviously not railroad. And we haven't really factored in the Comdata lift because the program is so new, so we didn't put a lot into the plan. But I'd say that from when we started the planning process, it is way more exciting in terms of early returns than we would have thought. And that goes back to just such a large part of the room nights bought in CLC are in this trucking industry. So call us stupid, but it was natural to obviously go to our trucking clients and make those offers. So we'll keep you posted, but that could obviously provide some upside to CLC.

[Ashish Sabadra:]

No, that sounds good. And then one final question for me on the virtual card. I think you mentioned it could be -- the growth rate could accelerate in fiscal year '16, maybe getting close to 20%, that's great news. I was just wondering if you had any update on one of the providers that was expected to come back? Any update on that front or any update on the healthcare vertical?

[Ronald F. Clarke:]

Yes, so I think it's probably close to a year ago now we called out the kind of the blip in the healthcare. Kind of 2 accounts quickly kind of went away, one was a big hospital chain and another one was a big account. And so we're kind of 1 of 2, the big hospital chain has stayed away, and the second account has come back. I think we've booked probably 10% or 15% already in our plan. Most of that will come back as we work our way through 2016. So we're expecting that account to kind of be back almost in full as we exit this year.

[Ashish Sabadra:]

Okay. No, that's very helpful. Actually if I can ask one more, the last one would be a follow-up to Tien-tsin's question. Would be like, when you think about deploying capital in Brazil, especially given the macro weakness and currency weakness, would that even be a consideration of you? I don't know if you can comment on it, but just I might as well ask.

[Ronald F. Clarke:]

Yes. I mean, look, we've been in Brazil for 3 or 4 years. And I think we've said it repeatedly, we are -- we're long on Brazil. It sets up very well for what we do, this workforce payments, it's got fuel cards and food cards and commuter cards and toll cards. It's got all kinds of workforce products and it's still kind of early days for a lot of those products, and a lot of those products are tax-advantaged. So we really like the country in terms of potential for our category. And so things were good when we got in 3 or 4 years ago and things are crummy now. And our guess is they'll be better a different day. So for the right kind of company, we'd still be long on Brazil.

[Operator:]

And our last question comes from the line of Darrin Peller from Barclays.

[Darrin Peller:]

Look, I just want to come back to the expenses side and the margin side. I mean you're operating under a -- obviously, a pressured macro environment and yet you're still obviously growing well on a sort of constant macro standpoint. But just recognizing '16 is going to still have a lot of these headwinds, can you give us a little more color on how you operate your -- like what -- from an incremental margin standpoint, what parts of your business do you think are being impacted the most right now? Is there -- still the same capability to reinvest the way you want to reinvest across the business and achieve your goals on growth as well at the same time? And then really, what -- if there's any more opportunity to kind of cause us to revisit that topic one more time?

[Ronald F. Clarke:]

Darrin, it's Ron. I'd say that on the bad calorie side, we continue to take cost out. And obviously, as we scale and as we automate things, I'd say some of our cost lines actually decreased going into '16. And the good calories, the 2 things we try to spend money on are sales, which we're investing over $20 million incremental in our plan for '16; and then kind of discretionary IT to build stuff and convert stuff and so on. And so I'd say more than 100% of the expense increase in 2016 are these sets of good calorie things. And the quote, all the rest of the expenses would be flat to down, and even with the FX. Obviously, the FX has got -- I don't know what those number is, an $8 million to $10 million expense haircut just moving the FX across.

[Darrin Peller:]

Okay. All right, that's helpful. And just one quick follow-up on Europe as well. You mentioned the universal program kicking off, going live. Look, obviously, I think you mentioned that could be -- you've mentioned in the past that could be, down the road, an enormous opportunity comparable to what the U.S. has been longer term. Can you just give us a little bit of an update on your expectations on the progression of that over the next year or 2?

[Ronald F. Clarke:]

Yes. It feels like the ground hog day speech, Darrin, we give on the major oils. It's has been way slower, I'd say, than we thought. And good news, bad news, way harder to get set up, to get through all the regs and the tax stuff and the IT and people. So the bad news is it's been more complicated, and thus we're slower kind of out of the block selling it and getting going. I think the good news is that, that's just timing, that our view still of the opportunity to have that kind of a unique offer that's obviously taken over the United States. I'd say, we're still real bullish on the long-term impact of that, and we're just going to stay patient and keep pushing and keep reporting back how we're doing with it.

[Operator:]

Thank you. This concludes tonight's conference. Thank you for your participation, and you may disconnect your lines at this time.