FLEETCOR Technologies, Inc.
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Greetings and welcome to the FLEETCOR Technologies, Incorporated First 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 of FLEETCOR Technologies. Thank you, Mr. Dey. You may begin.

[Eric Richard Dey:]

Good afternoon, everyone, and thank you for joining us today. By now, everyone should have access to our first 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 appear in today's press release and on our website, as previously described. Also, we are providing 2017 guidance on both the GAAP and 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 includes forward-looking statements about our 2017 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, 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. Appreciate your joining the call today on short notice. Upfront here, I will plan to cover three subjects. First, I'll comment on our Q1 results and rest of your outlook. Second, I hope to set the record straight on questions regarding our fees, our billing practices and our customer service. And then, lastly, I'll discuss the Cambridge acquisition announcement, along with the rationale for the deal. Okay. So, on to the quarter. We reported a good Q1. Revenue was ahead of our internal expectations by a few million, and cash EPS exceeded the high end of our guidance range. We reported revenue of $520 million, up 26%, and cash EPS of $1.96, up 28%. No big macro story. The macro environment was effectively neutral in Q1 versus the prior year, and it was really right in line with our 2017 expectations. Very importantly, our organic revenue growth accelerated to 10% in Q1. That includes our global fuel card line of business, which also grew 10% in the quarter. And as a reminder, that accounts for about half the revenue in the Company. New sales were good. They grew 12% in the quarter versus last year. Though in terms of growth, what drove growth in Q1, really three things. First, the addition of STP, which we did not own last year. STP continues to perform really on plan, grew 12% in constant currency in the quarter. A second driver was double-digit growth in almost every product line. I mentioned fuel cards up 10%, our corporate payments up 13%, tolls up 12%, hotels up 15%. And then, lastly, last driver, we enjoyed a 3% lower tax rate in the quarter versus plan. Eric will provide a bit more detail on the reason this also added to our beat. So, look, all in all, a really good start to the year. So, in terms of rest of year outlook, we're staying put with our initial 2017 guidance. The macro seems to be right where we called it and we expect the tax rate to flow back to a more normalized level of 29.5% the rest of the year. So, with those assumptions, we'll flow through the $0.11 beat to our Q1 guidance, raise our full year 2017 cash EPS estimate at the midpoint to $8.31, which will represent a 20% increase over 2016's reported $6.92. Okay. Let me shift gears and weigh in on the various questions that we've been getting regarding customer fees, billing practices and our customer service. I mean, upfront here, our opinion is that these research reports are fake news and exaggerations. There's obviously not enough time today to deal with all of the inaccuracies, so I'll cover just a few here. So, start with customers and customer value. Look, you have to provide value and benefits to customers. That's why customers use our products. In the case of fuel cards, value is really in four areas. One, hard savings, the actual rebates or discounts the customers get from retail prices; two, purchase controls that limit unauthorized purchases; three, convenience, an easy way for the employees to make purchases on the company's behalf; and then, last is reporting an automated record-keeping and exception reporting system. So, those are the four benefit areas for fuel cards. Last year, in 2016, our customers got hard savings, that is discounts or rebates from the retail prices of their transactions that approximated $1 billion, $1 billion. So, that's more than the total of all the customer revenue in every business we have combined. So, we provide plenty of hard savings to customers. So, do we get customer complaints? Yes. Of course, we do. We serve 700,000 active customers that are billed an average 30 times per year, but our registered complaint levels relative to the size of our client base is lower than a lot of our B2B card issuer peer group. We believe our customers are getting value and getting benefits with us. The most direct proof is customer retention, which runs over 90% and our small clients can leave our service at any time. There's no minimum contract period. So, we think we provide lots of customer value. Okay. Size of fees, these miscellaneous fees. So, let's address the size of our so-called miscellaneous fees. So, in 2016, the total of the "miscellaneous fees" was about $100 million, call it 6% of revenue. And of that, about 75% is concentrated in just two fee types, minimum program fees and high-risk credit fees. The balance of our customer revenue is in five big businesses. Those would be STP, SVS, telematics, CLC and Comdata trucking. So, the fees in those five businesses are quite simple and quite straightforward. So, a couple of examples. In STP, customers pay somewhere between $5 and $7 a month to get an electronic toll sticker that allows them to go nonstop through all the tolls in Brazil, an average of 14 times. In SVS where the clients are large retailers, they pay for the creation and processing of their branded gift cards under long-term contracts. So, these five businesses, they are close to zero miscellaneous fees. Okay, let me talk a little bit of late fees. The question we're getting is, do we make customers pay late? Do we, FLEETCOR, make customers pay late? So, no. First off, sizing of late fees total about $100 million. Last year, we carried a receivables balance, an AR balance of about $2 billion. We lose $50 million annually in credit losses and fraud, clients that don't pay us. We spend over $50 million (10

[Eric Richard Dey:]

Thank you, Ron. For the first quarter of 2017, we reported revenue of $520.4 million, up 26% compared to $414.3 million in the first quarter of 2016. The revenue from our North America's segment increased 8.7% to $329.9 million from $303.5 million in the first quarter of 2016. Revenue from our international segment increased 72.1% to $190.5 million from $110.7 million in the first quarter of 2016. For the first quarter of 2017, GAAP net income increased 11.3% to $123.7 million or $1.31 per diluted share from $111 million or $1.17 per diluted share in the first quarter of 2016. The other financial metrics that we routinely use, our 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. 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 compute adjusted net income to eliminate the affects of non-cash or non-recurring 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 first quarter of 2017 were $496 million, up 29% compared to $386 million in the first quarter of 2016. Adjusted net income for the first quarter of 2017 increased 27% to $185 million or $1.96 per diluted share compared to $145.7 million or $1.53 per diluted share in the first quarter of 2016. First quarter results reflect the impact of the macroeconomic environment. When we talk about the macroeconomic environment, we are referring to the impact that market fuel spread margins, fuel prices and foreign exchange rates have on our business. Changes in foreign exchange rates from the first quarter of 2017 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 a positively impacted revenues by approximately $10 million. And, finally, spreads were mixed and, we believe, unfavorably impacted our results by approximately $7 million. So, in total, the impact of these changes had a nominal negative impact on our first quarter revenues of approximately $2 million, and adjusted net income per diluted share of approximately $0.01. Organic growth was approximately 12% for the first quarter of 2017, or 10% when excluding the impact of the macroeconomic environment. We have additional financial disclosure this quarter, consistent with reporting of our 2016 year end results, which can be found in our earnings release. We have added organic revenue growth and the revenue by product category. So, now, you can see not only the revenue per transaction for each of our major products, but you can also see organic growth for each major product category on a pro forma and macro neutral basis. We have also included additional disclosures around our major sources of revenue. And major sources of revenue from customers, we are including processing and program revenue, late fees and finance charge revenue and miscellaneous fee revenue. Included in processing and program fee revenue, our revenues from customers based on accounts, cards, devices, transactions, load amounts and/or purchase amounts, et cetera, for participation in our various fleet and workforce related programs as well as revenue from partners, such as major retailers, leasing companies, oil companies, petroleum marketers or processing and network management services. These revenues primarily represent revenue from North America Trucking, lodging, prepaid benefits, telematics, gift cards and toll-related businesses. Miscellaneous fees include non-standard fees from customers, based on customer behavior or optional participation, primarily including high-risk credit surcharges, over credit limit surcharges, minimum processing fees, printing and mailing fees, environmental fees, et cetera. Miscellaneous customer fees accounted for approximately 6% of total revenue in the first quarter of 2017. Now, let's shift over and discuss other drivers of our first quarter performance. For our North American segment, most of our lines of business performed well, resulting in approximately a 10% organic growth rate in the quarter on a constant fuel price and spread basis. Some of the positive drivers in North America during the quarter included our MasterCard fuel card, which had organic growth revenue of approximately 23% over the first quarter of 2016. Our CLC business was up 15%, partner business was up 16%, corporate payments up 13%, just to name a few. International segment organic revenue was also up approximately 10% on a constant macro basis in the first quarter of 2017 versus the first quarter of 2016. Similarly, a number of businesses performed well in the quarter, including the Shell Europe business with revenue up mid-teens. Our Russia business has started to rebound and was up 18% in the quarter. Our Mexico business was up 23%. And our Travelcard and STP business were up in the low teens organically. So, a pretty good quarter in the international segment. Now, moving down to income statement. Total operating expenses for the first quarter were $325.4 million compared to $238.3 million in the first quarter of 2016, an increase of 36.6%. As a percentage of total revenues, operating expenses increased to 62.5% of revenue compared to 57.5% in the first 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 first quarter of 2017 operating expense were ongoing expenses related to the acquisitions closed in 2016. Also, stock-based compensation expense in the first quarter of 2017 was $24.6 million compared to $15.9 million in the first quarter of 2016. Deal-related expenses were approximately $1.5 million in the first quarter of 2017 versus approximately $500,000 in the first quarter of 2016. Credit losses were $13 million for the first quarter or 8 basis points compared to $6.8 million or 5 basis points in the first quarter of 2016. The increase in bad debt was primarily due to bad debt inherent in the acquired STP business, the addition of new euroShell locations and normal quarterly fluctuations of certain businesses. Depreciation and amortization expense increased 79% to $64.9 million in the first quarter of 2017 from $36.3 million in the first quarter of 2016. The increase was primarily due to the STP acquisition. Interest expense increased 43% to $23.1 million compared to $16.2 million in the first 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 rate for the first quarter of 2017 was 26.1% compared to 29.2% for the first quarter of 2016. The reduction in the tax rate was primarily due to excess tax benefits on share-based compensation in the first quarter of 2017 versus the first quarter of 2016. And a favorable mix shift impact of higher international earnings in the first quarter of 2017 versus the first quarter of 2016. We reported $1.96 in adjusted net income per diluted share, up 28% compared to $1.53 in the first quarter of 2016. Now, turning to the balance sheet. We ended the quarter with $735 million in total cash. $188 million is restricted and consists of primarily customer deposits. As of March 31, we had $2.4 billion outstanding on our term A loan, $244 million outstanding on our term B loan and $569 million drawn on our revolver, leaving $467 million of undrawn availability. We had $676 million borrowed in our securitization facility at the end of the quarter. As of March 31, 2017, our leverage ratio was 2.80 times EBITDA, which is below our covenant level of 3.75 times EBITDA as calculated under our credit agreement. We intend to use our future excess cash flow to temporarily pay down the balance on our revolving credit facility and securitization facility, and maintain liquidity for acquisitions and other corporate purposes. Finally, we are not a capital-intensive business, spending $15 million on CapEx during the first 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 favorably to our prior guidance, we believe it is too early to make a change to our full year guidance as a result of such a short-term trend. So, in summary, we are leaving our macro guidance assumptions unchanged for the balance of the year. Our financial guidance is as follows

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first question is from Ramsey El-Assal of Jefferies. Please go ahead.

[Ramsey El-Assal:]

Okay. I think I may know the answer to this question, but I feel like I need to ask anyway. With all of the recent scrutiny with the fee and billing practices, has it had any impact on your go-forward ability to implement pricing actions or change of practices or is it just business as usual?

[Todd W. House:]

Ramsey, it's Todd House here. I'd say, no, we've really seen no impact on our day-to-day business, our interaction with our SMB clients. We've had a couple of our largest clients in the enterprise segment ask some questions, but it's been easily talked off. And I'd say, our partners, the branded partners, BP and Chevron have also asked some questions, but in general, it's been quite easy to work with them.

[Ramsey El-Assal:]

Okay. So, my next question, which I think your answer was no, competitive impact as well?

[Todd W. House:]

That's correct.

[Ramsey El-Assal:]

Okay. Could you elaborate a little bit on the Cambridge acquisition? How quickly can you implement the cross-sell opportunity there in terms of integrating the two organizations? Is it something where it's going to be lengthy integration? Or is it something that's going to happen relatively quickly?

[Unknown Speaker:]

Hey, Ramsey. It's John (33

[Ronald F. Clarke:]

Hey, Ramsey. It's Ron. I mean, immediately we're going to take some specialists from Kurt's (33

[Ramsey El-Assal:]

Got it. And then, on the lodging business. Obviously, growths bouncing up pretty nicely there, understanding there is some easy comps, but are you seeing incremental health in some of your core verticals within that business, rail, energy, those types of clients?

[Ronald F. Clarke:]

Yes. It's good – this is Ron again. It's good to have the excuse train (34

[Ramsey El-Assal:]

Okay. Great. I'll leave it there. Thanks so much.

[Ronald F. Clarke:]

Thanks.

[Operator:]

Thank you. The next question is from David Togut of Evercore. Please go ahead.

[David Mark Togut:]

Thank you. Good to see the acceleration in organic revenue growth.

[Ronald F. Clarke:]

Thanks, David.

[David Mark Togut:]

I'm just digging in. Did you provide same-store sales for FLEETCOR overall in the quarter?

[Ronald F. Clarke:]

1.5% negative.

[David Mark Togut:]

Okay. That's about the same level as we saw in the fourth quarter?

[Ronald F. Clarke:]

Yeah. I think it's a shade higher, a shade point, David, in Q4 in Brazil. I mean, in the callout I'd give you in that average is Brazil is still not great, let's call it 5% to 7% in Brazil.

[David Mark Togut:]

Got it. Okay. And then, so WEX called out an increase in credit losses to 17 basis points in the first quarter. Yours are significantly lower at 8 basis points. Would appreciate your insights on kind of why the big difference and where you see credit losses going.

[Ronald F. Clarke:]

Yeah. Don't know. We don't follow their losses, but we've had no increase in either skimming or fraud or just losses generally. So, I'd say that our forecast, which we looked at a couple of weeks ago, is kind of same old, same old. So, we're not seeing it.

[David Mark Togut:]

Got it. And then, just shifting gears, revenue per transaction in the fuel card business did decline slightly by about 3% in the quarter. What were the main drivers behind that?

[Eric Richard Dey:]

Hey, David. This is Eric. One is the addition of the Travelcard acquisition. It has lower revenue per transaction in the line average. So, a little bit of mix going on in there as well. But if you look at the page that we provide and you look revenue per trend on a macro adjusted basis, it's actually up a little bit. So, A, macro adjusted, it's up a little bit; and then B, the mix impact of Travelcard caused it to go down if you look at it on a non-macro adjusted basis as well.

[David Mark Togut:]

Got it. And then, just a quick final question for me. Can you give us an update on organic growth at Allstar and how far are you through the conversion with Visa to chip card from mag stripe in the U.K.?

[Ronald F. Clarke:]

Yeah. David, it's Ron. So, it's a two-part question. Let me take the second first. So, virtually done, I think, other than a couple of partners. All of the accounts that we control directly are now on the combined card, and I think we have got one partner left to move across. So, that's good. And I'd say, we're in the testing mode now of kind of opening that card up. So, to kind of non-fuel spend the same program, I think I mentioned that we're on here in the U.S. So, we're in a good place platform wise, that the whole book is over, and we're now trying to get smart on the segments and what offers we made to the clients that we've got.

[David Mark Togut:]

And is growth picking up in that business from mid single-digits in Q4?

[Ronald F. Clarke:]

It's not. I don't have it in front of me. It was somewhere without the pound, without the FX and constant currency. It was, I think, probably mid single-digits, and again, the key to that, as I mentioned, is going to be the take rate, the fastest way to accelerate growth there is just non-fuel spend. So, stay tuned on it.

[David Mark Togut:]

Understood. Thanks very much.

[Ronald F. Clarke:]

Good to talk to you.

[Operator:]

Thank you. The next question is from Danyal Hussain of Morgan Stanley. Please go ahead.

[Danyal Hussain:]

Hi. Thanks for taking the question and thanks for all the detail. Just on organic growth again. That was a pretty quick recovery from the second half of last year, and I think you didn't really have much contribution from Speedway yet. So, how did that come in versus expectation and where were you, I guess, most pleasantly surprised?

[Ronald F. Clarke:]

You want to take it, Eric?

[Eric Richard Dey:]

Yeah. I would say, first of all, from a Speedway perspective, didn't have a big contribution in the quarter. We're going to the integration as we speak. So, we did have some volume, but it was relatively low for the quarter but it is going to start accelerating as we get into Q2 and then in the second half of the year in particular. I would say, we were, I'd say pleasantly surprised in a couple of areas as, one, I think fuel cards came in at a pretty solid 10% with another good contribution from MasterCard, and then the gift card business also came in very strong due to some card orders that came in in the first quarter. So, those were kind of the two areas that I would call out.

[Ronald F. Clarke:]

Yeah. And I'd add corporate payments. Corporate payments was a few million ahead of our plan.

[Eric Richard Dey:]

Yeah.

[Danyal Hussain:]

Okay. Great. And then, I just wanted ask about this internal review that I think have been referred to. Could you just talk a little bit about the scope of what we've covered and maybe some of the conclusions that you reached?

[Ronald F. Clarke:]

Yeah. I would say, Danyal, we're in process. So, we're running through an internal review of materials and websites and practices and how those various things compare to "market". So. I'd say that's kind of in process. And then, two, we've retained someone kind of independently to also review same set of things, so that I could get kind of two sets of feedback. So, I'd say, we're probably half to two-thirds of the way through both of those.

[Danyal Hussain:]

Okay. Are there any cost we should be cognizant up for the second quarter?

[Ronald F. Clarke:]

Costs, did you say?

[Danyal Hussain:]

Yeah. As it relates to this review.

[Ronald F. Clarke:]

No, it's that not material.

[Unknown Speaker:]

It's immaterial.

[Danyal Hussain:]

Okay. All right. That was it. Thank you so much.

[Ronald F. Clarke:]

Yes.

[Operator:]

Thank you. The next question is from Sanjay Sakhrani of KBW. Please go ahead.

[Sanjay Sakhrani:]

Thanks. Good afternoon. When you guys talked about synergies for Cambridge, are those revenues or are there also expense synergies?

[Ronald F. Clarke:]

It's Ron again. I'd say predominantly revenue. If you look at the cost structure of that company, it's pretty weighted in sales and service, so the "G&A technology piece" is smaller generally, so most of the upside that we're looking at is revenue.

[Sanjay Sakhrani:]

Got it. And then, we think about this specific deal and obviously it being one of the larger deals that you've done, should we assume that that kind of takes you out of the market to do deals for some period of time?

[Ronald F. Clarke:]

Not a good assumption.

[Eric Richard Dey:]

Never count us out.

[Ronald F. Clarke:]

Yeah. Again, to maintain leverage, like we said around 3 and I think we posted our math is 29. So, we're going to refi a bit, make sure we have capacity. John (42

[Sanjay Sakhrani:]

Yeah. And it seems like it's a pretty active pipeline?

[Ronald F. Clarke:]

John (42

[Unknown Speaker:]

Yeah. It's always active. I think with 10 guys globally, I think there's a never period of time when we're working at less than five deals actively. So, we're always busy looking at things.

[Sanjay Sakhrani:]

Got it. And one final question. When I look at transaction growth in the toll business, it seemed pretty weak. Could you just talk about that growth rate relatively to kind of what you guys expect going forward? Thanks.

[Ronald F. Clarke:]

Yeah. Again, that – it is. I think the volume, if you will, the trend growth, it's back to this headwind 6% to 7%. People, GDP, employment crush in that geography, in that country, and so I think there, even the great business that they have, despite and through their economic setup. But again, the – A, the sales channel stuff that we're putting in; and B, these new tolls that the country is going to put online, I think those, hopefully, will create some lift even if the economy stays soft.

[Sanjay Sakhrani:]

Okay. Any timing on that, on the new toll road?

[Ronald F. Clarke:]

John (43

[Unknown Speaker:]

I haven't looked at it for a year. But when we look at it based on the government reports, I think they had 10 roads to be built in the next two years. But, to be honest, I haven't updated that view.

[Ronald F. Clarke:]

Yeah. We'll come back. It's a good question. We'll come back with a view on that.

[Sanjay Sakhrani:]

All right. Great. Thank you very much.

[Operator:]

Thank you. The next question is from Jim Schneider of Goldman Sachs. Please go ahead.

[James Schneider:]

Good afternoon. Thanks for taking my question. Just kind of back on the customer fee and regulatory question. Can you maybe just – I don't think you mentioned any interactions with regulatory authorities like the FTC or CFPB or others. Can you maybe just talk about whether you've had any content from – contact from those authorities as a result of those – any of the debate around these topics on customer fees?

[Ronald F. Clarke:]

Jim, it's Ron. No, no contact.

[James Schneider:]

That's helpful. Thanks. And then, can you maybe just talk a little bit about the Cambridge platform and, I guess, where do you see the segmentation of where Cambridge stops in terms of smaller businesses, and then where the Comdata virtual card business starts? Maybe kind of talk about like what the natural borderline is for the size of businesses you plan to service on the B2B side and kind of the specifics of the Cambridge technical platform.

[Ronald F. Clarke:]

There's a big overlap, if you think, kind of $10 million at the low end and call it $300 million and you run the thing, $10 million to $100 million, $100 million to $300 million, $300 million plus. The first and most important comment is they literally sit on top of each other. Both the Comdata business and Cambridge business serve accounts in kind of those small, medium and large. Neither business is in what you would think of as big enterprise, corporate, right, the payment of the banks. But inside that kind of small, medium and large, Jim, I'd say Cambridge skews smaller because they target businesses that might have a pretty big percent, right, of international business, international payments, so they're able to kind of serve a bit smaller client than Comdata, which is a domestic AP. But really happy attraction to this thing is the relatedness of the type of customers basically and the fact that, over time, we can integrate a sales force to sell two highly related things to the same account.

[James Schneider:]

Helpful. And then, just a quick clarification. I think your competitor WEX also talked about seeing increased on-time payments of – by customers. Is that same kind of trend that you've seen in the quarter as well?

[Ronald F. Clarke:]

Nothing that stands out. We have, obviously, lots of different portfolios, but I'd say there's nothing in the trend one way or the other. It's relatively constant.

[James Schneider:]

Thank you.

[Operator:]

Thank you. The next question is from Peter Christiansen of Citi. Please go ahead.

[Peter Christiansen:]

Thanks for taking my question and thanks much for the discussion on the recent controversy and the added disclosure in the release. I guess my first question is really on Cambridge. On a pro forma basis, how should we think about your vertical concentration within certain industries?

[Unknown Speaker:]

So, as Ron said, it's very similar. This is John (47

[Peter Christiansen:]

And has pricing been relatively stable? Do you see that expanding, just some sense of what the pricing trends have been in cross-border payments?

[Ronald F. Clarke:]

Yeah. It's Ron. Let me take that one. I'd say that in kind of the old-fashioned phone trade and payments, I'd say the thing is kind of inching down some and I'd say the good news is in the online where there's integration into the systems that runs at a higher rate and, obviously, the mix is shifting big-time that way. So, if you look at this company in aggregate over the last five years, it's basically flat. Their bps per dollar of spend are fundamentally constant for the last five years; mostly, again, because the mix has moved to online.

[Unknown Speaker:]

Yeah. I could add to that. So, the online business has been growing at four times the rate of the in-person trade business. So that, as Ron said, is at a higher rate. Another area that's at a higher rate and that's growing very quickly is exotic currencies. So, if you look at what banks have done in FX over the past five years, a lot of them have gotten rid of their foreign correspondent networks and FX capabilities in smaller, non-major currency markets. And as a result, a lot of those people are turning to Cambridge for white label solution, the banks themselves. And if you're trying to send $100,000 to Malaysia, you will pay a higher spread to do that because it's an exotic currency. And so, they're seeing that part of their business grow much more quickly than the rest.

[Ronald F. Clarke:]

Yeah. Let me just add, Peter, because I failed to mentioned it, as you're talking here, the strategy, I think, for us, which maybe I didn't articulate well, is that we want to just capture more of a company's AP. So, if you think about a company's total AP, whether it's domestic or international or paid via check or paper today, historically, in the Comdata business, we grabbed only domestic and we basically try to grab the paper. So, we're getting 20%, 30% of a company's AP. We announced another initiative unrelated to Cambridge where we're going to offer a complete AP, where we'll take it no matter how it's paid, whether there's still some paper to pay, whether it's ACH. So, strategically, what we want to do is basically be able to carve out a company's AP in its totality, whether it's virtual card, paper or check, whether it's international or domestic, we want the whole thing. And so, that – strategically, that's where we're trying to head, and then to build the distribution system that can basically enable that.

[Peter Christiansen:]

And I guess, finally, longer-term is there a risk here from real-time payments, is that a longer-term threat?

[Unknown Speaker:]

I don't think so. When you think about where this company's focused on, it's focused on the SMB sector. And I think that's one of the ways they win. We haven't talked a lot about of that. So, both Comdata and Cambridge go-to-market with really a three-pronged value prop. First is just focus. They're actually calling on these small companies where the banks don't. Two is with differentiated service. They actually have specialists who know what they're talking about as opposed to a guy at their local branch bank who doesn't know anything about international payments. And then, three, they have better technology that integrates with them. So, the real-time payments is just the pipe, the way something gets paid, but not the consumer interface and how that payment integrates with their workflow. So, Cambridge will go in and then provide them a solution, hey, I've got 1,000 invoices I need to pay globally every month and I don't want to do that mainly with 20 people. And so, you can do them on the Cambridge system and what pipe it goes through is almost irrelevant to people.

[Peter Christiansen:]

Very helpful. Thanks, guys. Good job.

[Operator:]

Thank you. The next question is from Ashish Sabadra of Deutsche Bank. Please go ahead.

[Ashish Sabadra:]

Solid quarter. And thanks for that incremental disclosure. That was very helpful. I have a much broader question. There seems to be still a misperception about the growth profile and the growth opportunity. And, can you just talk about how much more penetration in cross-sell opportunity do you still have? Because MasterCard grew at a pretty accelerated pace this quarter as well, so if you can just talk about how much of the growth can potentially come from penetration, especially in the U.S. SMB business, and then cross-sell opportunity in your core business? Thanks.

[Ronald F. Clarke:]

Yeah. Ashish, it's Ron. I think we've said starting here, which is probably the most penetrated, at least with the universal cards, it's through the mid-term as long as we can see in this SMB segment. And then, the second thing, I think, we've told you is that we're launching a completely refashioned product line for what we call the micro accounts, kind of two to five, or two to six cards, which historically, we kind of let them jump in the boat, but not chased them. So, there are – there is still, as long as we can see in terms of trying to grow this thing 10% plus, plenty of opportunity here. And then, as you roll into the next two big markets, Brazil, it's literally day one, just beginning there, and then you roll into Europe, it's all about a better mousetrap with the universal product versus branded private label products. So, I've said it repeatedly, I think we're going to try to do a better job producing some opportunity map for you guys. But it's not opportunity limited, it's basically sales and marketing limited. We just have to create enough pressure to make the category and our products known to people.

[Ashish Sabadra:]

That's great. That's very helpful. And then, even when you talked about the retention being 90% plus, when you think about that less than 10% attrition, can you help us understand how much of it may be bankruptcy or businesses going out of business?

[Ronald F. Clarke:]

Yeah. That's another really good question. It's probably a third of 40%. The biggest one is really credit of that group, but there are accounts, obviously, that go out of business. So, call it, 4 in 10 accounts that would leave would be what we would call involuntary.

[Ashish Sabadra:]

That's great. Again, thanks for the color.

[Ronald F. Clarke:]

Thanks, Ashish.

[Operator:]

Thank you. The next question is from Tien-Tsin Huang of JPMorgan. Please go ahead.

[Reginald Lawrence Smith:]

Hey, guys. Good morning. It's Reggie, filling in for Tien-Tsin.

[Ronald F. Clarke:]

Hey, Reggie.

[Reginald Lawrence Smith:]

Just – I guess kind of just want to follow up on Ramsey's question from earlier. I think he asked about competition. I'm just curious, with all the headlines, had you received any inbound calls from some of your existing private label partners, and if you could share some of the, I guess, color around those conversions? And then, just your most recent updated thinking on kind of the Europe partner pipeline in RFPs and all that good stuff?

[Ronald F. Clarke:]

Yeah. Reg, it's Ron. So, yes, I mean, obviously big companies as Todd mentioned, including our partners call and go, what is this? What is this stuff here? So, we've obviously tried to provide a few facts and point out the areas of pure fiction to them. So, we've done that, although it's not helpful, right, having people that write stuff is not helpful. In terms of the Europe thing, it's kind of same as I think we said the last time, which is there are two pretty active European RFPs that are still progressing. They're still both saying they're going to make a decision although, as of this call, they haven't. So, no more to report other than a couple things that we're in the hunt for are still active, still alive, and open to decide something.

[Reginald Lawrence Smith:]

Got it. If I could sneak two more in. Just thinking about STP. Just curious, have you guys done any price modernization and kind of what's been the early reaction or response from that if you've done that? And then, number two, I think you talked about $1 billion in savings that you're cardholders get from having a card and kind of explain the value. Can you kind of put that in context of what annual spend is? Just to give us a sense for what that $1 billion is in relation to that. Thank you.

[Ronald F. Clarke:]

Yeah. The first one is we don't do price modernization. I'm not familiar, doesn't mean much to me. But yes, we studied, I think I told you, STP at some length and determined that the company wasn't particularly segmented. It looked really at the totality of the $4 million or $5 million tag holder, sticker holders that they had, and kind of used one price fits all, one size fits all. So, kind of priced everybody some huge tractor trailer that go 65 times with a bunch of axles and pays double the toll, as Ron (58

[Reginald Lawrence Smith:]

(59

[Ronald F. Clarke:]

In addition, Reg, which I didn't say in there, but we also facilitate another couple of billion in discounts that are negotiated between clients and our vendors and our clients where they do a deal directly and we basically help administer another couple billion of discounts as an independent source, which is clearly helpful to our clients as well.

[Reginald Lawrence Smith:]

That was helpful and a good, interesting data point, so we appreciate it. I didn't catch Comdata data group this quarter, did you guys provide that?

[Ronald F. Clarke:]

13%.

[Reginald Lawrence Smith:]

13%. Okay. Thank you.

[Operator:]

Thank you. And our final question is from Darrin Peller of Barclays. Please go ahead.

[Darrin Peller:]

Thanks, guys, for the incremental color. Just quickly on the MasterCard product. I mean, most of the questions have been answered, but on the MasterCard side, I know the interchange rates have changed recently. I think you mentioned that was in guidance, just to verify that. And then, how meaningful is that, as well as, – I know you also – I believe you mentioned on the call, renegotiated terms with MasterCard, I believe. If you can comment on that and what impact would be?

[Ronald F. Clarke:]

Darrin, hey, it's Ron again. So, yes and yes is the headline answer. So, sometime in April, I think, it was around the third week, MasterCard implemented a bit higher interchange in our category, and yes, that we've been aware of that and that was built into our 2017 plan of guidance. And question two, yes, we've signed a new long-term agreement with them in the middle of last year.

[Unknown Speaker:]

July.

[Ronald F. Clarke:]

July of last year. That was, obviously, good for them because it committed us to kind of work with them even though we're obviously working with Visa in Europe, and they were good to us in terms of the terms. So, we think it was kind of a win-win.

[Darrin Peller:]

Okay. All right. That's helpful. And then, just quickly, Ron, bigger picture now. I mean, this deal Cambridge announced, obviously we have been waiting for another acquisition at some point soon in the corporate payments category. It makes sense, given how strong the virtual payments product you guys have was. I mean, what is your goal again in terms of let's say three years from now, four years from now to be in terms of percentage for card versus corporate payments? Are there other assets down the road? And how long we're going to wait now for the next deal? Just give a little bit more color on the capital allocation plan and really the overall strategy of where you want this business to be in, let's say, three years.

[Ronald F. Clarke:]

Yeah. That's again, Darrin, a really good question. So, again, I think in Eric's tables here, we actually were right on 50% fuel card revenue for the quarter, 50% of the $520 million we reported. So, with Cambridge, if we had that obviously, we'd be that now into the 40s somewhere, right, if we had the Cambridge thing. So, what I'd say is that we invest and work on things that we understand. And so, we've had a couple of years to understand the corporate payments, and I think with all the questions we get about opportunity, having a category that has massive opportunity like the corporate payments in the Cambridge, it's interesting to us now that we understand the basis on which to compete. So, one of the attractions to us is, John (01

[Darrin Peller:]

All right. That really helps. Really quickly, any thoughts about a possible Investor Day at some point in the next year or two? Thanks again, guys. Nice job (01

[Ronald F. Clarke:]

Yeah. With this particular noise, I do want to say this is really unhappy for us to have fiction thrown at us and not an easy way to assure people that we do things right and we play the game fair. And so, we have chatted over the last couple of weeks about showcasing the business more. So, we'll be back, Darrin, with something specific on that. We think it's starting to be probably a pretty good idea.

[Darrin Peller:]

True. Thanks again, guys.

[Operator:]

Thank you. I would now like to turn the conference back over to management for closing remarks.

[Ronald F. Clarke:]

I want to thank everybody for joining us today, and we'll talk to you next quarter.

[Eric Richard Dey:]

Thanks, guys. Appreciate it.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.