Greetings. Welcome to the FLEETCOR Technologies, Inc. Second Quarter 2017 Earnings Conference Call. As a reminder, this conference is being recorded. I would like to turn the conference over to our host, Mr. Eric Dey, Chief Financial Officer for FLEETCOR Technologies. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us today. By now everyone should have access to our second quarter press release. It can be found at www.fleetcor.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial information including adjusted revenues, adjusted net income and adjusted net income per diluted share. This information is not calculated in accordance with GAAP and may be calculated differently than other companies' similarly titled non-GAAP information. Quantitative reconciliations of historical non-GAAP financial information to the most directly comparable GAAP information appears in today's press release and on our website, as previously described. Also, we are providing 2017 guidance on both a GAAP and non-GAAP basis with a reconciliation of the 2. Finally, before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. This includes forward-looking statements about our 2017 guidance, new products and fee initiatives and expectations regarding business development and timing of acquisitions and dispositions. They are not guarantees of future performance, and therefore, you should not put undue reliance on them. These results are subject to numerous risks and uncertainties, which could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today's press release on Form 8-K and in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Others are described in our annual report on Form 10-K. These documents are available on our website, as previously discussed, at www.sec.gov. With that out of the way, I would like to turn the call over to Ron Clarke, our Chairman and CEO.

Okay. Eric, thanks. Hi, everyone, and thanks for joining the call this afternoon. Upfront here, I'll plan to cover 2 subjects. First, I'll comment on our Q2 results and rest of year outlook. And second, I'll provide an update on some recent developments. Okay, so on to the quarter. We reported very good Q2 results, generally consistent with our internal expectations. We reported revenue of $541 million, up 30%; and cash EPS of $1.99, up 26%. That's back-to-back quarters of profit growth above 25%. The macro overall was a nonfactor in our Q2 earnings. Fuel price and fuel spreads were a bit favorable, but FX, interest rates and our tax rate were unfavorable versus the prior year. So again, overall neutral macro against profits. Organic growth, 9% in Q2 with fuel card revenue growth of 8%. Revenue growth in our other 4 major product lines was double digit. That excludes our all other category. Same-store sales finally strengthened in Q2 to plus 1%. We had particular strength in lodging and corporate payments. Q2 sales grew 7% versus prior year, with 2 of our smaller international markets, Mexico and Russia, grew sales 100% versus last year. Q2 cash flow expanded to $125 million, up 40% versus last year and up $70 million sequentially versus Q1 '17. Q2 global customer revenue retention was 91.5%. That's 9 consecutive quarters of 90%-plus retention. So in terms of drivers for Q2. Basically, 3 things. One, STP made a big contribution. We didn't own that last year. It grew 14% on a pro forma basis. Again 9% organic growth, about $40 million flowed through into earnings. And last, we had about 1 million fewer shares outstanding. I do want to point out that a few things did not go as well as we planned in Q2.…

Thank you, Ron. For the second quarter of 2017, we reported revenue of $541.2 million, up 29.5% compared to $417.9 million in the second quarter of 2016. The revenue from our North American segment increased 14% to $343 million from $301.1 million in the second quarter of 2016. Revenue from our international segment increased 70% to $198.2 million from $116.8 million in the second quarter of 2016. For the second quarter of 2017, GAAP net income increased 12.7% to $131 million or $1.39 per diluted share from $116.3 million or $1.22 per diluted share in the second quarter of 2016. The other financial metrics that we routinely use are adjusted revenues and adjusted net income, which we sometimes also refer to as cash net income or cash EPS. Adjusted revenues equal our GAAP revenues less merchant commissions. A reconciliation of adjusted revenues and adjusted net income to GAAP numbers are provided in Exhibit 1 of our press release. Adjusted revenues in the second quarter of 2017 were $510.6 million, up 29.1% compared to $395.6 million in the second quarter of 2016. Adjusted net income for the second quarter of 2017 increased 24.7% to $187 million or $1.99 per diluted share compared to $150 million or $1.57 per diluted share in the second quarter of 2016. As a reminder, 2016 adjusted net income per diluted share reflected the impact of adoption of the new accounting rules for stock option-based compensation. Second quarter results reflect the impact of the macroeconomic environment. Changes in foreign exchange rates from the second quarter of 2016 were primarily negative and overall, we believe, negatively impacted revenue during the quarter by approximately $5 million. Fuel prices were mostly favorable during the quarter. And although we cannot precisely calculate the impact of these changes, we believe positively impacted…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2% to 3%, Ashish, in Q2.

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

You got it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thanks, guys. I appreciate it.

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