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Edited Transcript of FLT earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 Fleetcor Technologies Inc Earnings Call

NORCROSS Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Fleetcor Technologies Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric R. Dey

FleetCor Technologies, Inc. - CFO & Corporate Secretary

* James P. Eglseder

FleetCor Technologies, Inc. - Head of IR

* Ronald F. Clarke

FleetCor Technologies, Inc. - Chairman, President & CEO

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Conference Call Participants

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* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* James Edward Schneider

Goldman Sachs Group Inc., Research Division - VP

* Oscar D. Turner

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Peter Corwin Christiansen

Citigroup Inc, Research Division - VP and Analyst

* Ramsey Clark El-Assal

Barclays Bank PLC, Research Division - Research Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

* Ryan Allen Cary

BofA Merrill Lynch, Research Division - Research Analyst

* Tien-Tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the FLEETCOR Technologies Second Quarter 2019 Earnings Conference Call. As a reminder, this conference call is being recorded.

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

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James P. Eglseder, FleetCor Technologies, Inc. - Head of IR [2]

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Good afternoon, everyone, and thank you for joining us today for our second quarter 2019 earnings call. With me today are Ron Clarke, our Chairman and Chief Executive Officer; and Eric Dey, our Chief Financial Officer. Following comments from Ron and Eric, the operator will announce an opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions.

Our earnings release and supplement can be found under the Investor Relations section of our website at fleetcor.com. 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 non-GAAP information at other companies. 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. We are also providing updated 2019 guidance on both the GAAP and non-GAAP basis along with reconciliations.

Finally, before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. This includes forward-looking statements about our guidance and outlook, 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 upon them.

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

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

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [3]

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Okay. Jim, thanks. Good afternoon, everyone, and thanks for joining our second quarter earnings call. Upfront here, I plan to cover 4 subjects: first, I'll provide my perspective on our Q2 results; second, I'll preview our outlook for the second half; third, I'll report a bit on the continued progress of our beyond strategy; and lastly, I'll comment on the acquisition front.

Okay. So on to Q2. We reported Q2 revenue of $647 million, up 11%, and $285 million in cash EPS, also up 11%. On a constant macro and constant scope basis, or what we call like-for-like basis, revenue was up 13% and cash EPS approximately up 13%. Both revenue and cash EPS results topped our expectations, revenue coming in about $7 million better than planned and cash EPS $0.06 higher than the midpoint of our guidance range.

Notably, our overall organic revenue growth accelerated nicely to 13% in Q2. That marks the highest organic revenue growth quarter since we started reporting like-for-like revenue in 2016. So we're quite pleased.

Inside of that, our fuel card organic revenue growth was 9%. Our 3 nonfuel lines of business, all exceptional: lodging up 13%; toll up 17%, corporate pay up 26%. The volume growth in each of those 3 nonfuel lines of business, quite good. In lodging, our SMB room nights were up 15%. In toll, our active tags, which drive revenue, up 7%. And in corporate pay, our virtual card spend, up 20%. So very strong volume growth.

Our trends in the quarter continued quite good. Our new sales or new bookings, up 18% versus prior year. Our client or business retention continued steady at 92%. Our same-store sales came in at minus 1% but largely due to softness among the large retailers in our gift segment. Excluding gift, same store would have been a push.

Our balance sheet, in a very good place. Q2 leverage finished about 2x, and our July term loan upsizing of $700 million brings our revolver liquidity now to over $1 billion. So we're well positioned to allocate capital to either acquisitions or buybacks in the second half.

So in summary, Q2, probably one of the best quarters in quite some time. Record organic revenue growth of 13%. Very strong volume growth in our 3 nonfuel businesses. Continued positive sales growth and retention trends. And Q2 profits above the top of our guidance range.

Okay. Let me transition to our outlook for the second half. So today, we're confirming overall revenue growth guidance of 9% to 11% rest of year and fuel card organic revenue growth in that same range. We're raising full year 2019 cash EPS guidance to $11.68 at the midpoint. That reflects our $0.06 Q2 beat to guidance.

There are a number of assumptions or kind of moving parts rest of year. We're expecting a bit more unfavorable macro than when we spoke last time and a slightly higher share count than when we spoke last time. But those will be offset by lower interest expense going forward and likely better acquisition contribution driven by the SOLE deal going forward. So look, when you take all these items together, they effectively net to 0 in terms of rest of year impact.

Also as a reminder, our rest of year guidance anticipates pretty big increases sequentially in both revenues and profits.

Okay. Let me transition over to an update of our beyond strategy. As a reminder, the idea, quite simple: to offer our existing fuel, lodging and toll clients the opportunity to spend more with us by opening up the network or adding locations in which they can purchase things. This increases the utility of our card programs to our clients and results in incremental spend and revenues for us.

So beyond fuel, here in the U.S., we added 2,000 new beyond fuel clients in Q2. That brings our active beyond fuel client count to about 6,700. This set of beyond fuel clients contributed approximately 1% to 2% of our incremental revenue growth in the quarter. So starting to be helpful.

Still lots to do. We're targeting about half of the 100,000 eligible existing fuel clients and continue to monitor credit trends quite carefully. But it seems clear to us that our fuel card clients do like the idea of making adjacent mobility and supplier purchases on a single business account with us.

Lodging. In our beyond lodging initiative, we added about 10,000 new hotel locations to our 15,000 proprietary network a couple of months ago. And in June, we captured about 3% of our overall room nights coming from the expanded network. So based on our forecast, we're hopeful that the expanded network could add about 2% of incremental revenue growth to our SMB lodging business by year-end.

In terms of beyond toll, our Brazil initiative, we've now nearly tripled our parking, gas station and drive-through network from about 1,000 locations at the time of acquisition in 2016 to over 2,700 locations today.

And the adoption in the expanded network is growing. At McDonald's, for instance, we had 65,000 transactions in March. That grew to 135,000 transactions in June, and we're expecting approximately 250,000 McDonald's transactions as we exit December. So a big pickup.

Very importantly, sales of our new nontoll, or what we call urban users, are also growing. We added approximately 18,000 new urban user tags in Q2. That's up significantly from 3,500 that we signed in Q1. So the conclusion is our beyond strategy is gaining traction. Adoption's accelerating, and the new revenue contribution in every business, growing.

Okay. Last up is acquisitions. I'll touch on the 2 transactions that we recently closed, Nvoicepay and SOLE, and also provide a brief update on our acquisition pipeline. So Nvoicepay, we were delighted to announce that acquisition on our last earnings call. The primary rationale again for that deal, strengthen our position in full IP, or integrated payables, in which we help clients pay 100% of their monthly supplier invoices. And that's via every payment modality: card, ACH, even paper check.

So we've made good progress in the first 90 days that we've owned Nvoicepay. We've advanced the synergies that we outlined at close, and we expect Nvoicepay the transition from approximately $0.03 dilutive in Q2 to accretive in Q4.

SOLE, we closed the SOLE Payroll Card acquisition on July 1. SOLE is a payroll card tuck-in. It's about 1/4 the size of our existing payroll card business and has historically grown revenue about 30% annually. So we like it as an add-on for a couple reasons. First, it's complementary to our existing business in that it focuses on SMB accounts. And it's developed a pretty ratable partner distribution channel with payroll processors to sell more or further penetrate that SMB segment.

And then second, we expect significant synergies via the combination as we consolidate our tech platform and our existing bank and network relationships. So expect SOLE to be accretive in 2020.

In terms of pipeline, our acquisition pipeline, still active. We've got 3 close tuck-in opportunities, one each in our fuel, lodging and corporate pay businesses. And as I mentioned earlier, we've got plenty of liquidity to pursue them.

So in closing, again, a very good Q2 with revenues and profits ahead of our expectations. Our rest of year outlook is good. We're planning sequential step-ups in revenues and profits. Our beyond strategy is starting to take hold. Client adoption, accelerating. And the revenue contribution, becoming more meaningful.

The integration of our 2 recent acquisitions, also progressing nicely. We're capturing synergies and expect both of those deals to be accretive to 2020 earnings.

So with that, let me turn the call back over to Eric to provide some additional details on the quarter. Eric?

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [4]

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Thank you, Ron, and good afternoon, everyone. For the second quarter of 2019, we reported revenue of $647.1 million, up 11% compared to $585 million in the second quarter of 2018. GAAP net income increased 48% to $261.7 million from $176.9 million. And GAAP net income per diluted share increased 52% to $2.90 from $1.91 in the second quarter of 2018. Both of these reported numbers include the impact of a tax benefit associated with the sale of our Masternaut investment, which was a benefit to GAAP net income of $65 million and GAAP net income per diluted share of $0.72 per share.

The sale of our investment in Masternaut allowed the company to offset the capital loss recognized against the previously recorded capital gain from the sale of NexTraq in the third quarter of 2017.

Non-GAAP financial metrics that we'll be discussing are adjusted net income and adjusted net income per diluted share, for which the reconciliation to GAAP numbers is provided in Exhibit 1 of our press release. Adjusted net income for the second quarter of 2019 increased 8% to $256.7 million compared to $237.8 million in the same period last year. And adjusted net income per diluted share increased 11% to $2.85 compared to $2.57 in adjusted net income per diluted share in the second quarter of 2018.

Second quarter results reflected negative year-over-year impact from the macroeconomic environment of approximately $10 million in revenue, in line with our expectations. The negative macro impact was primarily due to lower foreign exchange rates when compared with the second quarter of 2018, which we believe negatively impacted revenue by approximately $17 million due primarily to unfavorable rates in Brazil and the U.K.

Fuel prices were slightly better year-over-year in the second quarter, and although we cannot precisely calculate the impact of these changes, we believe it was a positive $1 million to the quarter. And finally, fuel spreads had about a $6 million favorable impact in the quarter.

Organic revenue growth after adjusting out the impact of the macroeconomic environment and the Chevron deconversion was approximately 13% for the second quarter of 2019, and all major product categories performed well during the quarter.

Organic growth in our fuel card business was 9%, driven by solid growth in most of our fuel card businesses. Our beyond fuel initiatives contributed about 2 points of growth. The corporate payments category continues to perform well and was up 26% organically during the quarter. The growth in corporate payments was driven by both our cross-border business, which grew in excess of 30% in the quarter, and our virtual card business, which grew approximately 20%.

Our toll business was up 17% organically, driven primarily by new toll tag sales, rate initiatives and more beyond toll revenue. Our lodging business was up 13% on a print basis and would have been up approximately 16% if you adjust out the roughly $1 million in emergency-related revenue from the second quarter of 2018. So all in all, another very good quarter for our nonfuel business, resulting in very strong organic growth performance in the quarter.

Now moving down the income statement. Total operating expenses were up 9.2% for the second quarter of 2019 to $349.8 million compared with $320.2 million in the second quarter of 2018. The increase was primarily due to acquisitions and normal growth in our operations.

As a percentage of total revenues, operating expenses were approximately 54.1% compared to 54.7% in the second quarter of 2018. Included in operating expenses are credit losses of $18 million for the second quarter of 2019 or 7 basis points compared to $14.5 million or 6 basis points in the second quarter of 2018.

The higher-than-normal credit losses were due primarily to fraud losses in our U.S. fuel card businesses. Fuel card fraud should improve as U.S. fuel stations begin transitioning to chip and PIN technology in late 2019 and 2020.

Depreciation and amortization expense increased 3% to $70.9 million in the second quarter of 2019 from $68.6 million in the second quarter of 2018. The increase was primarily due to acquisitions completed in 2019. Interest expense increased 19% to $39.5 million compared to $33.2 million in the second quarter of 2018. The increase in interest expense was due primarily to the impact of additional borrowing for share buybacks throughout 2018, recent acquisitions and increases in LIBOR.

Our effective tax rate for the second quarter of 2019 was a negative 1.7% compared to 23.5% for the second quarter of 2018. And if you adjust out the tax benefit related to the sale of Masternaut, our effective tax rate would have been 23.6%.

Now turning to the balance sheet. We ended the quarter with $1.49 billion in total cash. Approximately $318 million is restricted and consists primarily of customer deposits. As of June 30, 2019, we had $3.614 billion outstanding on our term loans and revolver and approximately $478 million in undrawn availability. We also had $974 million borrowed in our securitization facility at the end of the quarter.

Subsequent to the end of the quarter, we completed a $700 million upsizing of our Term A loan facility. We will initially use the additional funds to pay down the revolving credit facility and securitization facility. And we now have approximately $1.2 billion in availability. We plan to use these funds for acquisitions or future share repurchases of our stock.

As of June 30, 2019, our leverage ratio was 2.1x EBITDA, which is well below our covenant level of 4x 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 spent approximately $17.5 million in CapEx during the second quarter of 2019.

Now onto the update for the outlook for 2019. First, we are raising our full year revenue guidance $20 million at the midpoint to reflect our second quarter outperformance and the acquisition of SOLE Financial, which closed in early July. We are also raising our GAAP net income and GAAP net income per diluted share guidance to reflect our second quarter beat and the impact of the Masternaut-related tax benefit in the quarter in addition to the acquisition of SOLE Financial.

We are also raising our adjusted net income per diluted share guidance by $0.06 to $11.68 at the midpoint to reflect our second quarter results compared to our expectations.

Also, we expect a few moving parts in our balance of the year guidance. For the balance of the year, we expect the macro impact to be slightly worse than our prior guidance due primarily to lower fuel prices and unfavorable foreign exchange rates. We also expect a slightly higher share count due primarily to an increase in our share price, which impacts the calculation of fully diluted shares. Partially offsetting these impacts will be favorable interest expense due primarily to interest planning initiatives implemented and lower LIBOR rates and the impact of acquisitions, which will be slightly accretive over the balance of the year.

So taken in total, these puts and takes net to 0 in terms of financial impact on our balance of the year guidance. Please refer to our second quarter earnings call supplement for additional information regarding our guidance.

So with that out of the way, our guidance is as follows: total revenues to be between $2.625 billion and $2.675 billion; net income to be between $865 million and $895 million; net income per diluted share to be between $9.60 and $9.90; adjusted net income to be between $1.04 billion and $1.07 billion; and adjusted net income per diluted share to be between $11.53 and $11.83.

Some of the assumptions we have made in preparing the guidance includes the following: weighted fuel prices equal to $2.75 per gallon average in the U.S. for the balance of the year for those businesses sensitive to the movement in the retail price of fuel; market spread slightly below the 2018 average; foreign exchange rates equal to the 7-day average as of July 28, 2019; interest expense of between $150 million to $160 million; approximately 90.3 million fully diluted shares outstanding; a tax rate of 23% to 24%; and no impact related to acquisitions or material new partnership agreements not already disclosed.

And finally, for the third quarter of 2019, we are expecting adjusted net income per diluted share to be in the range of $3 to $3.10.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Togut with Evercore ISI.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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With 13% organic revenue growth for Q2 and with your 2019 guide staying at 9% to 11%, is that just conservatism? Or are you expecting some deceleration in organic revenue growth in the back half of the year?

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [3]

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Dave, this is Eric. Yes. I mean, it's a couple of things. One, obviously, we expect our businesses to continue to perform, actually accelerate as we get into the second half. It's more like we have tougher comps. So last year in the second half of the year, our businesses accelerated as well. So we're expecting again accelerated growth overall but then just tougher comps from an organic growth perspective.

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [4]

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David, it's Ron. We've also got the gift [in] the other, which we don't call out, looking those to be not super great in the second half. So probably still double digits for the nonfuel lines, in that 9% to 11% number.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [5]

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Got it. And then any specific assumptions on corporate payments in the back half? It seems like you're just starting to benefit from the cross-border growth there, up 30%.

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [6]

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Yes. They could probably still start with the 2 in Q3 and 4.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [7]

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Got it. And then what was the growth rate for the MasterCard fuel card in the second quarter?

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [8]

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Hold on one second. We're looking it up, Dave. I think it was in the low 20 percentage, if I...

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [9]

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No. It was still up pretty high. So Dave, we'll look at that...

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [10]

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The combo, Dave, we call it our local business. I'm looking at the local business. It was up 13 for Q2, which includes our Fuelman business and MasterCard. I don't have the split in front of me, but it's circa, in that range.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [11]

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Got it. And just a quick final question. The 18% growth in new sales bookings in the second quarter, any key drivers of that acceleration from what we saw in Q1?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [12]

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I mean all -- I'm looking at the sales page. All look pretty good. The corporate payments again was blockbuster. It was up almost 40% over prior year. And the Brazil, I think I mentioned the new sales channels there that we launched 2 or 3 years ago were just rocking again. So that's just way, way up. So I'd say those are the 2 pulling the rest.

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Operator [13]

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

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [14]

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So with the revenue accelerating, and Ron, like you said, sort of high since you started reporting that organic metric, I'm curious if you can attribute that to anything. It seems like you're hitting on a lot of the right areas.

Is it fair to just say it's greater focus across the broader organization with new sales up, retention up, organic growth accelerating? Just what would you point it to, if you want to stay there?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [15]

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Yes. I think it's a good question, Tien-Tsin. I'd say a couple things. One is it's mix obviously. So having bigger businesses here that have bigger TAMs makes the nonfuel lines grow. And then second, to your point, we have had, starting with me, more focus on the knitting because we've done less big deals right in the last 12 to 24 months. So I think both of those things have brought more focus in today's business.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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Cool. Good to know. And then on the bookings front, and I know David just asked it, I'm curious, how much of the bookings could we assign to your beyond initiatives? You're at 2% now. Do you have a target for maybe exit rate? Could that get much better?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [17]

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Yes. We don't actually book-keep our sales or new bookings per se into the beyond buckets yet. It's a bit of a manual kind of system. But I'd say again, the hope is for those things to step up, call it another point over the next, call it, 2 quarters. So they're building, like I mentioned, in the beyond fuel. We're still chasing the first 50,000 clients here. We're up to just under 7,000. We're going to turn our attention to the other 50 as we start to move through the second half. So stay tuned. Hopefully, more, same on the beyond tolls, same on the beyond lodging. So it's definitely picking up. I tried to give a few stats of that progress. But clearly, as those bases keep getting bigger, it should contribute more.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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Okay. That's useful. And last one, just quickly on payroll. I think going back to your roots a little bit there, Ron, I'm just curious, is that a bigger focus potentially for the company? Or is it really just enhancing your corporate payments outlook?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [19]

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Yes, it might be. We like that space, because again, it's another employee payment product. We're not in payroll processing a la ADP, and there's a number of kind of independent assets given all this consolidation. So a lot of us has been keyed a bit into that. There may be some assets that could get loose here.

But we like it. I mean this one we pulled the trigger on, we liked it because it's really 100% SMB, which we like, Tien-Tsin. And it's got a sales model to work with processors, payroll processors. So we like the idea of building that payroll card business more in the SMB space than in the mid or large. So we just liked it a lot, and we could afford it really because of the synergies that we could bring being in the business. So it's a nice little add-on that helps us head in a direction that we like.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Jim Schneider with Goldman Sachs.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [21]

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I was wondering if you could maybe throw a little bit more statistical color on the progress for beyond fuel. I believe you said it was 2 points incremental last quarter. I think this quarter, you said it was 1 to 2 points.

Can you give us any kind of sense about -- in terms of the acceptance of the clients that are taking you up on the offer, the uplift on spend relative to kind of the 40% metrics you provided last quarter? And just to confirm that additional point or so of acceleration, is that kind of a statement about exiting this year or more of a statement about 2020?

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [22]

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Yes. Jim, this is Eric. We continue to add more customers to the base of the beyond fuel bucket. So I guess as an example, if you remember from last call, I think we said we had about 5,000 clients that were actually in that beyond -- using the beyond fuel capability. We've accelerated the acceptance to about 7,000 clients at the end of Q2. And again, we're still looking at accelerating the acceptance of that to about 100,000 customers eventually. So we're slowly getting to do that.

So I think as we get into 2020, you'll see that beyond fuel category accelerate by another point or so. At least that's our goal at this point.

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [23]

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Jim, it's Ron, just to add to it. So when we use the term beyond fuel, I think we mentioned before that there's different use cases that we kind of stick under that umbrella. So for example, we call internally the companion card, when we go back to fuel card clients we already have and try to add a card, right, that would let them buy AP. We have a different thing when we try to go to like a construction vertical and sell a twofer product, one that buys fuel and construction supplies. And we even have a third use case when we go out to trucking clients and have the trucking company put the payroll of the driver literally on the card and then use it as debit card.

So every one of those use cases creates incremental spend by the client, incremental utility for the client, obviously, incremental revenue. And so the lift-off amount, the 40% I referenced in the last call, they vary, if you will, by those applications. So the companion card probably is in the 25% range, the construction card is probably 50% or 60%, and the payroll card probably in that 40% range. So it varies basically by use case.

But the message I think we're trying to leave everybody with is it's working, right? We're adding clients. We're keeping clients. Each one of the use cases is building. And so to Eric's point, there's a lot of comparison to the prior period. But I think the headline is that this idea is now working. And it's growing, and it's actually adding, like we're saying, a couple of points to growth. And my comment was as you get into, call it, Q1 of next year, we should think about it going up another point.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [24]

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That's great color. And then maybe you can comment on the overall corporate payments side of things and particularly the sales activity you're saying there and maybe comment specifically on the kind of sales and lead generation you're seeing through some of your partners, software channels versus the Nvoicepay channel itself and maybe just kind of talk about whether you see the opportunity. Or do you have the desire to kind of acquire additional software assets in that space?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [25]

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Yes. I mean I think they're all working. Our own direct business, we're getting much better I think on the marketing side. So we're teeing up more softball, more leagues. So that's one of the reasons our direct business is growing.

I think our channel partners, some of the ones that you guys know that are private are really doing super. They're investing lots of money in their respective channels. So we're getting the benefit of their growth. Same thing in our FX business. We doubled down on the sales investment and went after larger accounts. So we're seeing that now in our sales numbers that even if the account -- the new account count is the same, the dollars per account are way up.

So I'd say that the corporate pay selling machine is working almost across the board. And in this model that we have of working with ERPs, which is part of the whole Nvoicepay pay idea there, their core business, levers the old ADP accounting stuff, car dealers and a couple of big construction packages. And so this idea of working with ERP partners in an integrated fashion to serve our joint clients is working quite well. So it's literally, Jim, across the board, the selling is working there.

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Operator [26]

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

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [27]

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A follow-up on the corporate payments business. The Nvoicepay, Ron, I guess, knowing you, not that surprised that Nvoicepay is going to be accretive sooner than you thought at the end of the year. But it is -- to me, it seems like that opportunity is so large. Should it be accretive by the end of the year? I mean are -- the AP automation piece, how big of that be? And are you investing to the level that you should be to drive that business to much -- multiples of what it currently is?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [28]

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Yes. So I would say, Bob, don't presume that the version from dilutive to accretive is based on flipping sales or marketing or even IT investments. It's not. We're actually spending more as we move into the second half. It's simple, [lay down] synergies around contracts, for example, that they have and merchant acceleration. We can take our 500,000 or 600,000 merchants and get their card penetration up. It's easy low-hanging fruit money that we're grabbing more than it is that we're trying to govern or dial back on the investment. So that's point one.

Point two is, [yes], really of all the areas, I mean, the TAM and try to monetize this payable turning AP, which is again half of the business spend, into something that's cardable or we can get it per tran fee if it's ACH or something. It's -- you know this. The opportunity is massive. So you shouldn't read any comments about accretion into what's not understanding that or us not investing a lot in that.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [29]

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Then you mentioned 3 acquisitions that are, I guess, in the pipeline that are obviously not guaranteed to close. But are they -- I mean on the M&A side, should we expect larger transactions? Or I mean how are you -- do you have visibility on -- do you expect some of those deals to close, I guess, before the end of the year? Or would you be buying back stock?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [30]

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Again, when we tried to comment on our pipeline, there's a number of dimensions, right? There's the size of the deal. There's the timing. Are they now or later? There's the categories that we're in. So we're trying to just provide a little bit of flavor around the near-in things, things where we sign term sheets to where we're way along or far along in them.

So my comment on the pipeline is we have 3, what I would call, closed-in things that will either kind of close in the next 90 days probably or not that are in the tuck-in kind of size, hundreds of millions of dollars, not $1 billion, not $50 million.

And then as always, we have some larger transformational things that we're exploring that are not as near in. So the headline is we've done a couple, like 3, Eric, I guess, year-to-date, kind of 3.

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [31]

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Yes, 3 tuck-ins.

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [32]

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I would think you should think that probably 1 or 2 more of those kind of things would happen in the second half. And as you know, given our leverage ratio and enhanced liquidity, we're obviously in a good spot to go after something larger. So we're getting to a place we've had time to focus on the knitting and the basic business, and we're in a game that tries to buy businesses and improve them. So you should expect that we're continuing to try to do that.

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Operator [33]

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Our next question comes from the line of Ramsey El-Assal with Barclays.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [34]

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I wanted to ask about the beyond tolls performance in Brazil. I mean the statistic you threw about the McDonald's effectively were really impressive.

In that subsegment of that offering, just sort of the drive-thru QSR business, how should we think about the addressable market there? I mean those are incredibly impressive results of McDonald's. How unique is McDonald's as a partner in that market? And is this the type of thing where we can think of over time that you had multiple merchants like McDonald's ramping like that?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [35]

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Ramsey, it's Ron. I think you're thinking about it the right way. So the press that we've had on this idea is, hey, we've got this 5 million users and parking and fueling and drive-thru are obviously merchants that are pretty interested in our customer base.

And so I think of it as this first 3 years that we've owned the thing has been fundamentally piloting. We've added whatever I mentioned, a couple thousand incremental locations of parking, fueling and McDonald's. And not shockingly, there's more people lined up in every one of those categories.

So in parking, we signed up the next biggest parking operator and I think we've added 3 or 4 more. And in fueling, we've added [Carrefour]. And in drive-thru, we've got 2 more things that are teed up that have decent kind of drive-through footprints. We've even signed a thing, which we haven't announced, but we've signed with Nissan where we're going to factory install the stickers in all their new vehicles. And as soon as we sign that and start to talk about it, we now have other manufacturers there reaching out on the same idea.

So I think this proof of concept, when you can relay what's happening in a gas station or at a McDonald's to the next set of drive-thru people is the key to get nothing built. So we're trying to give you the message that it's really early, but it is -- again, it's working and we expect to keep rolling the thing out.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [36]

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Great. That's terrific. I wanted to ask a completely separate question about -- there's been a lot movement in the industry in terms of alternative networks. You've got the Fed announcement. You've got MasterCard and Visa both moving into kind of alternative rails. Obviously, all the mega merchants are talking about kind of on-us type of capabilities meaning FIS and Fiserv and potentially even global payments to some degree. You've alluded in the past that there might be some capabilities that you have in terms of the assets that you possess to run alternative kind of network path, maybe particularly on the corporate payments side.

Can you comment on your kind of most updated thinking along those lines?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [37]

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Yes. I think we said this from the beginning that we want to get merchants digital. And so when we sign up a business and they've got 1,000 merchants to pay, and we realize that only 200 of those are cardable, let's say, on the MasterCard network, we scratch our heads a bit and say, okay, what could we do to digitize some of the other 800?

So this idea of what we call internally ACH-plus or creating some rails that provide some incremental data to merchants and maybe some earlier funding and stuff to merchants is something that we're exploring. We've built a bit of a network.

And I think what we said is it's a land grab, Ramsey, now. So we're mostly focused on signing up clients and getting the first 200 merchants cardable. But you should think about us over time and particularly with the Nvoicepay going back and trying to digitize with our own network more of those merchants that are really unserved by Visa or MasterCard.

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Operator [38]

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Our next question comes from the line of Oscar Turner with SunTrust Robinson Humphrey.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [39]

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My question's on fuel. Are the beyond fuel-related cards typically replacing other cards? And then just wondering if you're seeing existing beyond fuel customers shift more spend to those cards over time.

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [40]

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Yes, Oscar, it's Ron. So on the first part of the question, it's no. So generally, we simply toggle open the cards. So we have parameters, control parameters on the card programs. So if you're a boss and you want us to open up 5 of your 10 employee cards to buy construction supplies, we can flip a switch and open up 5 of them and keep the other 5 locked down. Or b, we can give you a new card for your AP head to use to put AP purchases and leave the same 10 cards that are out in the field.

So the answer is we tend not to replace the cards. We either "open them up" or add new cards.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [41]

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Okay. And just as far as the -- are you seeing existing customers shift more spend?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [42]

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Yes. That's, I think, the comment earlier. The different use cases we have. We're picking up anywhere from 25% to 50% incremental spend with the account as they buy or put payroll on and put construction supplies and put AP. So the total amount of business that we're doing with the client is growing in the 25% to 50% range.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [43]

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Okay. That's helpful. A follow-up is just on -- I guess a high-level question about growth and margins just given some of the longer-term initiatives you're working towards. Do you think any of those initiatives are attractive enough, like maybe it's beyond fuel or tolls, that you would think about stepping up the marketing spend significantly?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [44]

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Yes. I mean I think it's a really good question. So let me give kind of a 2-part answer to this. The first one is, if anything, the guidance that Eric gave for the second half anticipates a faster profit growth. So if you look at our first half print, I think our cash EPS print was 9, and I think our macro adjusted print, [profit] print was 13. We expect in the guidance that Eric gave you, $11.68, both of those numbers to go up. I think our print output is 13%, which is a step-up in our macro-neutral cash EPS growth of 17.

So the first headline is that sitting inside the guidance we gave you, there's an implied acceleration in our profits and our margins. That's point one.

Point two, would we spend more if we thought we could sell more? The answer is yes, we would inside of a couple constraints: one, try and deliver some profit growth; and number two, the practicality of how we could spend the money and how productive the incremental money can be. We're not interested in just spending money, and obviously not producing anything. And so some forms of our marketing investment you can push a button on like search words and e-mails and things like that and then other ones that are people-intensive like telesales or field take longer to build. You can't just hire 100 brand-new people in a quarter.

So I think the answer is it still will probably be somewhere in between. Every year, we step up our sales and marketing investment. We stepped it up faster in corporate pay. And to the extent that we can get this AP thing going better, I think we'll continue to step it up. But again, we won't go overboard, I guess, is my message.

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Operator [45]

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Our next question comes from the line of Ryan Cary with Bank of America Merrill Lynch.

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Ryan Allen Cary, BofA Merrill Lynch, Research Division - Research Analyst [46]

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I wanted to ask on the toll business. When we look at the 17% organic growth in the quarter, is there a way to parse out the contribution from the legacy toll business versus contribution from beyond toll initiatives? While obviously beyond toll is still early, I'm just trying to get a sense if it is large enough to move the needle.

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [47]

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Can you repeat the question again? Sorry, you kind of broke up on us.

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Ryan Allen Cary, BofA Merrill Lynch, Research Division - Research Analyst [48]

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Yes. I'm just trying to get a sense if all of these -- all these great momentum behind beyond toll, if the growth rate there is large enough to move the needle for overall toll organic revenue growth, and if it's not, when we could potentially see it kind of be large enough to be a needle-mover.

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Eric R. Dey, FleetCor Technologies, Inc. - CFO & Corporate Secretary [49]

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Yes. I mean, we're stepping up our investment continuously in the beyond toll category, as Ron indicated earlier. I mean we now have over -- I think over 1 million people that have toll tags that can actually use those cards to buy other things like fuel as an example. And we're also marketing that product to people that are using the toll product as an other than toll- first sort of thing, meaning they want to buy fuel but they don't really spend a lot on -- in the toll roads and they want to buy fast food, and they want to buy parking. So we've got a different universe of customers.

And as Ron indicated, we're starting to partner with some major -- with a major car brand, Nissan, who's starting to install the toll tags directly into the vehicle as it's manufactured, which is obviously going to be a boon for us as well.

So yes, we're going to start seeing some accelerated growth as acceptance increases over time and as our investment in sales and marketing steps up over time. So we're going to -- starting to sell to more customers. So we're very bullish on the prospects for the beyond toll category.

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [50]

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Ryan, it's Ron. I'd just add to what Eric said. And I'd say if you said, hey, in Q2, it's probably less than 1%, and the reason again simplistically is the company there has really 100% of all the toll locations, been around, whatever, 15, 20 years. It covers every -- primarily every tollbooth in the land, and yet we don't have every parking, obviously every gas station or every drive-thru. We have tiny percentage of gas stations and drive-thrus.

So I think the question earlier today is the right way to think about it, which is this is almost a pilot period where we're showing that these other networks can matter and can get used and are liked by the clients. And as those build and we get larger percentages of drive-thru restaurants and gas stations, that, that growth rate will have -- will become obviously way more material.

So I'd say this thing will be a bit slower build because we've got to kind of build the network whereas in beyond fuel we have the MasterCard network, right, it can go up a bit faster because the network's already there. We just have to get clients to spend on it. This one is we're actually a network builder, which I hope everyone gets, is a super sustainable thing once you get it up. And it creates a great barrier to other people trying to kind of copy us. Hey, I have your dad's toll company now. I'm glad you have that built because we built that plus these 5 things.

And so that's the game. We're in a race to build a way more interesting network to these mobility people.

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Ryan Allen Cary, BofA Merrill Lynch, Research Division - Research Analyst [51]

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Got it. And then switching to kind of the corporate payments side of the business. Clearly, growth of both Comdata and Cambridge were very strong in the third quarter. Was there any contribution to the growth rate of either from Nvoicepay, which I believe is either integrated into both or is in the process of being integrated? Or is this more of the strong performance of the stand-alone assets?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [52]

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Well, that thing grew like a weed. I mean the problem is it's small, right? So against the other 2 businesses you talked about, it's tiny. But on the front end, I think it grew 50% or 100%. So it's as a standalone business, and obviously, we've got way more selling capability to help it. So that thing is growing both top and bottom quickly. It was already growing quickly, by the way, before we bought it, but it's growing faster now. But I'd say most of the headline numbers we're quoting you are coming from the 2 core things that you called out just because they're bigger.

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Ryan Allen Cary, BofA Merrill Lynch, Research Division - Research Analyst [53]

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Got it. But I know you're integrating Nvoicepay. It wasn't like due to integration that caused the growth rates to which expand or accelerate, prior to the Comdata or Cambridge assets?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [54]

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No. Some of it is. It is both. Again, I think we told you that there's some things we've done like on the merchant side and some things we've done with our ERP people and the sales rates. So we put a number of things in already.

The thing has moved from, like I said, the minus 3 to flat to plus 2 over the course of sequential quarter. So it's moving quite nicely top and bottom. It's just not driving the overall 26% number that we quoted.

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Operator [55]

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Our next question comes from the line of Peter Christiansen with Citibank.

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Peter Corwin Christiansen, Citigroup Inc, Research Division - VP and Analyst [56]

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Nice outperformance, guys. I have 2 questions. First, Ron, you talked quite a bit the last couple of quarters about shifting a lot of marketing towards digital. I just wanted to see if you have an update on what kind of productivity or efficiency gains that you're seeing on that front. And could you extend that strategy onto some of the beyond initiatives as well?

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [57]

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That's a great question, Peter, yes. Inside of our sales results, which were up 18%, we had another record global digital contribution. I think digital has now, in the U.S., surpassed 40%. I think it's 42% to 44% of all our new sales in the U.S. are coming digital. And then b, we started to crunch the digital thing into seamless applications that the whole process becomes digital. So I'd say that we're still early in it, but between enabling digital outreach and then digital applications as well as the science around the landing pages or the click-through, I think that our sophistication in B2B digital is up dramatically over the last 2, 3 years. And I'd say there's still way -- to your question, way more room to go.

And I think we're still trying to sort how we can invest more in that because unlike the people thing, you can step on that faster and still keep it productive. So getting better, more sophisticated. It's producing more, but I think there's still more runway there.

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Peter Corwin Christiansen, Citigroup Inc, Research Division - VP and Analyst [58]

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That's helpful. And then there's been some negative press lately, I guess, on some of the truckers, particularly in the shipping side. Just wondering what you guys are seeing on your OTR. And any pockets of weakness there? That would be helpful.

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Ronald F. Clarke, FleetCor Technologies, Inc. - Chairman, President & CEO [59]

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Yes. It's for sure soft. I'd say we saw some of it in Q1. I'd say we saw more of it here in Q2 and partly because we have the beyond fuel initiative, what we call OnRoad initiative there. It helped our revenue growth in that segment. But I think the underlying same-store sales in our trucking business has actually gone negative.

I quoted 1% same-store negative globally for our business or call it a push, call it a 0. If you take out our gift card business inside of that, I think our trucking was, call it, minus 1 or minus 2. So we're seeing really the same kind of softness that the industry is.

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Operator [60]

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Ladies and gentlemen, that's all the time we have for questions. And this ends the call. Everyone, have a great day.