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FleetCor Technologies Inc  (NYSE:FLT)
Q4 2018 Earnings Conference Call
Feb. 06, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Greetings, and welcome to the FleetCor Technologies Fourth Quarter 2018 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Jim Eglseder, Head of Investor Relations for FleetCor Technologies. Thank you. You may begin.

Jim Eglseder -- Head of Investor Relations

Good afternoon, everyone, and thank you for joining us today.

By now you should have access to our fourth quarter press release and supplement, which can be found on our website at 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 non-GAAP information at other companies. Quantitative reconciliations of historical non-GAAP financial information to the most directly comparable GAAP information appear in today's press releases and on our website as previously described. Also, we are providing 2019 guidance on both a GAAP and non-GAAP basis 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 to Ron Clarke, our Chairman and CEO. Ron?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Okay, Jim. Thanks. And as always, we're delighted to be with you this afternoon.

Upfront here, I'm going to plan to cover four subjects. So first, I'll run through my view of our Q4 results. Second, I'll provide a bit of a wrap-up on our full year 2018 results. Third, I'll our preview our guidance for this year, 2019. And then lastly, I'll speak to our Company's top priorities.

Okay. So on to the quarter. Q4 results: we reported Q4 revenue of $643 million and cash EPS of $2.78; that's up 15%. Revenue did surprise us on the upside, finishing over $20 million better than our expectations. We had virtually no scope differences in the quarter. On a consistent GAAP basis -- both GAAP revenue and organic revenue both grew 11% in the quarter.

On the good news front, our fuel card organic revenue growth accelerated to 9%. Obviously, overall Q4 revenue particularly strong, first off, because the fuel card growth did normalize into the high single digits. Our corporate pay business rocked, up 24%. Toll business strong again on the back of tag volume up 4%, along with incremental parking and fuel spend lifting revenues there. Our lodging business continued its healthy, small business room night growth. Room nights up 22%. That resulted in 19% overall lodging growth if you exclude FEMA. So really strong revenue performances really across the board.

Our trends in the quarter also remained very solid. Same store sales, plus 1%. Overall client retention 92%. New sales -- new bookings hit record levels, finishing up 20%. And inside of that, our new fuel card sales up 17%. So a really terrific sales finish.

So, look, all in all, Q4 may be one of our best quarters ever: revenue way above expectations; accelerating organic fuel card revenue growth, back to 9%; profits at the top of our guidance range; record sales; and continued healthy client, same store sales and retention levels. So, really a nice way to finish.

Okay. Let me transition to our 2018 full year results. So first off, record financial results across the board. Revenue for the full year, up 13%. Cash EPS of $10.53, up 23%. Full year sales up 15%. That's with over 120,000 new business clients signed last year.

Full year organic revenue growth across all of our lines up 10%. Retention above 90%, ticking up to 92% in the second half. And our two newest acquisitions, STP acquired in 2016 and Cambridge, acquired in 2017 both had really terrific performances last year. So Cambridge, our international payments business, in its first full year with us, grew revenue 24%, grew sales 27% and grew EBITDA over 60%. And we got that business squarely focused on larger accounts. STP, a great 2018: revenue up 18%, sales up 32%, EBITDA up over 20%.

In addition, STP completed a massive IT conversion onto a brand new system, retired their old system. They also greatly expanded their network acceptance, doubling acceptance and parking lots adding another major fuel retailer to accept their technology and even launched the McDonald's drive-thru acceptance. So our newest business is performing very well.

Another significant development in 2018 was organization. We created a new, more consolidated organization structure in the Company around our four major product lines. We now have one North American fuel organization, one lodging organization that includes the CLS acquisition, one Brazil organization that combines our legacy Brazil businesses with STP and one corporate payments business, which combines Comdata corporate pay business with Cambridge. So internally, four businesses now aligned with our external reporting.

So all around, 2018 a very good year: excellent financial performance, terrific new acquisition performance, continued positive fundamentals and trends and really a strengthened management team squarely focused on our four major product lines.

Okay. Let me transition to our outlook for this year, 2019. So today, we're providing organic revenue growth guidance overall of 9% to 11%. We're also providing fuel organic revenue growth guidance of 9% to 11%. That obviously reflects an acceleration from last year. We're also expecting our non-fuel lines, corporate pay, tolls and lodging to all grow mid-teens this year. We're guiding GAAP revenue to $2.6 billion at the midpoint. That reflects a 7% increase in print revenue. We're guiding cash EPS to $11.55 at the midpoint. That reflects a 10% increase in print earnings. Our 2019 outlook on the macro this year is quite challenging. Our assumptions include unfavorable FX, lower fuel prices and higher interest rates which, together, we estimate to create about a $0.60 cash EPS headwind to our results in 2019.

Eric will cover the bridge in some detail, but from a revenue bridge -- again, organic revenue at the midpoint, 10%, a scope change associated with the Chevron divestment of 1%, macro headwinds of 2%, equals our print revenue growth guidance of 7%, so 10 minus 1 minus 2. On the profit or cash EPS side, normalized cash EPS growth expected of 17%. Adjust that for the scope change of the Chevron divestment, 2%; the macro, including higher interest rates, 5% negative; that equals the 10% at the cash EPS, print.

We're targeting global new sales or sales bookings to grow 15% in 2019 and that's on the back of a 15% increase last year. So I guess the message here is that the fundamentals of the business are quite good. We're guiding to another year of 10% overall organic revenue growth, which translates to 17% normalized cash EPS growth, that's before the impact of divestments and macro. So that's consistent with our mid-term targets of 10% revenue growth and 15% to 20% profit growth.

Okay. Lastly, let me transition to the Company's priorities in 2019. So four major priorities. So first our portfolio. We continue to reposition the FleetCor portfolio for faster growth. We continue to explore restructuring options for SVS. We're looking to take incremental positions in the corporate pay and hotel space. And we're still pressing to gain entry into Asia. So continuing to work to rebalance the portfolio.

Second priority is sales. We continue to build a bigger, more productive global selling system. We are move into even more digital selling in '19. We're moving to more sales enabled selling versus cold calling. We're making a bigger effort to sell back to our client base versus just to new prospects. And we continue to explore new channels, new ways to go to market through partners.

Third priority is our big growth initiatives. We've talked at length about our four big product expansion opportunities or use cases, including Beyond Fuel, here in the US; Beyond Toll in Brazil; digital booking and lodging and our full AP offering and corporate pay. We're hopeful that these organic growth initiatives will become more important contributors to revenue as we run through the year.

And lastly, acquisitions continue to be a top priority for us. We have a number of near-in transactions we're looking at in fuel, in lodging and in corporate pay. We continue to refine the thesis for each of those that would give us the conviction to pull the trigger.

So in closing, we're pleased with our Q4 finish and our full year 2018 results. But more importantly, we're pretty bullish on the future. We're outlooking 9% to 11% overall organic revenue growth and 9% to 11% fuel card revenue growth this year. Trends and fundamentals are sound. We're working, taking actions to further refine our portfolio for faster growth. We're progressing some of the new product expansion ideas and turning them into important contributors. And we're continuing to chase acquisitions that we can improve and make accretive. So we like what we see.

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

Eric Dey -- Chief Financial Officer

Okay. Thanks, Ron.

Before I get started on the numbers, I want to remind everyone that the Company has adopted the new revenue recognition standard ASC Topic 606 via the modified retrospective method of adoption effective January the 1st, 2018. Under this method 2017 results are not restated. As I've done previously, I will talk about revenue in two ways, first using the new GAAP convention which compares 2018 using the new ASC 606 standard to 2017 using the prior standard. And then I will discuss revenue for 2018 and 2017 as if ASC 606 was never adopted so you can compare revenues the way we have historically presented it. This is the last quarter I'll be comparing revenue to the prior revenue standard ASC 605 as starting in 2019 the quarters will be comparable.

Now on to the quarter. For the fourth quarter of 2018 on a GAAP basis under ASC 606 standard we reported revenue of $643.4 million, up 5.5% compared to $610 million in the fourth quarter of 2017. As a reminder, merchant commissions and certain third party processing expenses are now netted against revenue, which resulted in a reduction in revenue of approximately $36 million in the fourth quarter of 2018 versus the prior standard.

For the fourth quarter of 2018, GAAP net income increased 7% to $302 million or $3.33 per diluted share from $282.7 million or $3.05 per diluted share in the fourth quarter of 2017. Included in the fourth quarter of 2018 net income was $153 million gain from the sale of the Chevron portfolio. Included in the fourth quarter 2017 net income was a benefit of $127.5 million from the adoption of the new Tax Reform Act.

Revenues in the fourth quarter of 2018 excluding the impact of ASC 606 were $679.9 million, up 11% compared to $610 million in the fourth quarter of 2017. Adjusted net income for the fourth quarter of 2018 increased 12% to $252 million compared to $224.1 million and adjusted net income per diluted share increased 15% to $2.78 compared to $2.42 in the fourth quarter of 2017.

We also experienced a mixed macroeconomic environment in the fourth quarter of 2018 compared with the fourth quarter of 2017. Movements in foreign exchange rates were primarily negative, with most of the impact from the Brazilian real, as the currency was down roughly 15% from the fourth quarter of 2017. We believe foreign exchange rates negatively impacted revenue during the quarter by approximately $25 million.

Fuel prices declined in the quarter, but most of the decline happened late in the quarter, which caused year-over-year fuel prices to still be favorable by approximately 10%. And although we cannot precisely calculate the impact of these price changes, we believe our revenue was positively impacted by approximately $9 million. And finally, fuel spreads had about a $13 million positive impact in the quarter as spreads widened at the end of the quarter as fuel prices fell. So in total, those changes had a negative impact of approximately $3 million on our fourth quarter revenue, compared with the fourth quarter of 2017.

Organic revenue growth was 11% overall for the second quarter in a row. All of our major product categories performed well during the quarter, and as expected, our fuel card business finally lapped the 2017 conversion issue and produced 9% organic growth, which was a little better than we had expected back in October.

The corporate payments category continues to perform very well and was up 24% organically during the quarter. The growth in corporate payments was driven by both Cambridge, which grew in excess of 30% in the quarter, and the Comdata Corporate Payments business, which grew 20%.

Our toll business was up 13% organically, slightly lower than the third quarter as we started to lap some pricing initiatives implemented in the fourth quarter of 2017.

Our lodging business was up 4% as the growth rate was negatively impacted by the lapping of approximately $6 million of FEMA revenue in the fourth quarter of 2017. Excluding the FEMA impact in both periods, the growth rate this quarter would have been approximately 19% as we continue to add customers and grow room nights.

As a reminder, there was also about $4 million FEMA benefit in the first quarter of 2018, which will cause a reported organic growth rate for our lodging segment to potentially be in the upper single digits in the first quarter of 2019. Excluding that impact, we expect that the core growth rate will be in the mid to high teens for the first quarter of 2019.

Now moving down the income statement. Total operating expenses for the fourth quarter were $358.7 million compared to $370 million in the fourth quarter of 2017. Included in the fourth quarter of 2018 was the impact of ASC 606 which netted approximately $39 million of merchant commissions and certain processing expenses against revenue. Excluding these impacts in 2018, operating expenses would have been up approximately 7%. The increase was primarily due to acquisitions completed in the second half of 2017, other investments funded from savings from the new tax act and asset write-offs.

As a percentage of total revenues, operating expenses were approximately 56% compared to 61% in the fourth quarter of 2017. Excluding ASC 606, operating expenses as a percentage of total revenue would have been approximately 58% in the fourth quarter of 2018.

Credit losses were $21 million for the fourth quarter or (ph) 8 basis points compared to $8.9 million or 5 basis points in the fourth quarter of 2017. The increase in credit losses was primarily due to an increase in fraud losses in the fuel card business and a one-time customer bankruptcy. We do not expect the fraud losses to continue at that level as we have implemented measures to reduce the losses going forward although we currently expect losses to be a bit higher than normal in the first quarter of 2019 and return to more historical levels in the second quarter of 2019.

Depreciation and amortization expense increased 2% to $67.2 million in the fourth quarter of 2018 from $65.8 million in the fourth quarter of 2017. The increase was primarily due to additional CapEx spending. Interest expense increased 24% to $38.2 million compared to $30.8 million in the fourth quarter of 2017. The increase in interest expense was due primarily to increases in LIBOR and additional borrowing for share buybacks.

Our effective tax rate for the fourth quarter of 2018 was 23.9% compared to a tax benefit of 35.7% for the fourth quarter of 2017. As a reminder, included in the fourth quarter of 2017 was the favorable impact of adoption of the Tax Reform Act of $127.5 million.

Now turning to the balance sheet. We ended the quarter with $1.3 billion in total cash. Approximately $313 million is restricted and consists primarily of customer deposits. As of December the 31st, 2018, we had $3.9 billion outstanding on our term loan and revolver and approximately $250 million of undrawn availability. We also had $886 million borrowed in our securitization facility at the end of the quarter.

In the fourth quarter of 2018, we repurchased approximately 3 million shares of our stock for $578 million, resulting in a total share buyback for 2018 of approximately 5 million shares for $959 million. Also, on January the 23rd, the FleetCor Board authorized a further increase in their share buyback authorization of $500 million, resulting in a total current repurchase authorization of $551 million.

As of December the 31st, 2018, our leverage ratio was 2.35 times EBITDA, which is well below our covenant level of 4 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, CapEx expense in the fourth quarter was $25.1 million.

Now on to the outlook for 2019. Before I walk you through our 2019 outlook, there are a number of puts and takes I want to make sure you have considered as you model the walk from 2018 actuals to our 2019 guidance. Please refer to our fourth quarter earnings call supplement for a bridge from 2018 to 2019 revenue and adjusted net income per share.

First, we are planning for another 9% to 11% organic growth rate year. Please note that all discussions in 2019 on fuel card organic growth will exclude the impact of the Chevron divestiture. The fuel card category is now expected to grow organically in the 9% to 11% range, which is back to historical levels. Growth is expected to be led by continued solid performance in most of our fuel card businesses, including the international operation, the North America trucking business and a return to solid growth in our North America local operation.

We expect the corporate payments, toll and lodging businesses to grow mid-teens in 2019 and gift and other to be approximately flat. Our 2019 guidance includes the Chevron divestiture impact of approximately $35 million in revenue and approximately $0.19 in adjusted net income per share. The conversion is expected to be completed early in the second quarter so the impact will be fully in the run rate in the second quarter.

I also want to update you on our latest thinking about the macroeconomic environment. We expect the macro to negatively impact our revenue and profit for 2019. We are estimating that the absolute price of fuel will be about 10% lower than the 2018 average. Foreign exchange rates, if they continue to be at today's level, will also have a negative impact on revenue. And spreads will be slightly unfavorable to 2018. In total, we believe these items will create an estimated $50 million revenue headwind and negatively impact cash EPS by about $0.30 to $0.35 per share.

Other items that will impact our 2019 results include a lower share count due to 2018 share repurchases, which will positively impact adjusted net income per share by about $0.40. Interest expense is projected to be approximately $20 million higher in 2019 versus 2018 due to the impact of share buyback and increases in the LIBOR rate. We did enter an interest rate swap agreement to fix approximately $2 billion of our debt, limiting the downside risk from further rising rates. So, all in, we estimate the higher interest expense will negatively impact 2019 EPS by an estimated $0.17 per share.

So with that out of the way, our guidance for 2019 is as follows: total revenues between $2.570 billion and $2.630 billion; net income to be between $800 million and $830 million; net income per diluted share to be between $9.05 and $9.35; adjusted net income to be between $1.015 billion and $1.045 billion; adjusted net income per diluted share to be between $11.40 and $11.70. This guidance represents approximately a 7% growth in revenue and 10% growth in adjusted net income per diluted share for the year at the midpoint of the range.

However, the overall message here is that the fundamentals of our business are quite good. Another year of guiding to 9% to 11% organic growth -- revenue growth, which delivers 17% normalized adjusted net income per share growth before the impacts of divestments and the macro.

Some of the assumptions we have made in preparing the guidance include the following: weighted fuel prices equal to $2.60 per gallon average in the US for those businesses sensitive to the movement in the retail price of fuel for the balance of the year; market spreads slightly unfavorable to the 2018 average; foreign exchange rate equal to the seven day average as of the week ending February the 3rd, 2019; interest expense of $160 million; fully diluted shares outstanding of approximately 89 million shares; and an adjusted tax rate of 23% to 24%; and as always, no impact related to acquisitions or material new partnership agreements not already disclosed.

Now for the first quarter. I want to remind everyone that our business has some seasonality and that typically the first quarter is the lowest in terms of both revenue and profit. First quarter seasonality is impacted by weather, holidays in the US and lower business levels in Brazil due to summer break and the Carnival celebration that occurs in the first quarter. Also, the first quarter revenue will be impacted by unfavorable foreign exchange rates when compared to the first quarter of 2018 as well as the Chevron divestiture.

With that said, we are expecting our first quarter 2019 adjusted net income per share to be between $2.55 and $2.65. Additionally, our volumes should build throughout the year and our new initiatives gain momentum throughout the year, resulting in higher revenue and earnings per share in the second through fourth quarters.

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

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Ramsey El-Assal with Barclays. Please proceed with your question.

Ramsey El-Assal -- Barclays -- Analyst

Hi, guys, thanks for taking my call here. I had a question on guidance. In the context of the acceleration that you're anticipating in the second through fourth quarters, how much are you depending on the new products like Beyond Fuel and Beyond Tolls to accelerate and to basically gain traction and how good of a line of sight do you have that that will materialize at this point?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Ramsey, hey, it's Ron. I'd say still not very significant. Maybe call it 1 point to give you an estimate.

Ramsey El-Assal -- Barclays -- Analyst

Okay. And then I wanted to ask about this -- just in general, the impact of fuel prices on the business. It seems like over time, we've seen the part of your business that is directly exposed to fuel, the discount revenue side of that get a little more heavily weighted versus the spread-based revenue. And I'm sure -- I know Comdata when you bought that company, it had it -- it mixed that around a bit. Should we continue to see this sort of discount exposure of the business grow and the spread exposure shrink and what are the drivers there now is that mix shift?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Say again, Ramsey. I'm not -- I'm not I'm clear.

Ramsey El-Assal -- Barclays -- Analyst

So your revenues are directly exposed to fuel.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah.

Ramsey El-Assal -- Barclays -- Analyst

And some of it is basically sort of like interchange exposure and some of it is spread-based exposure, basically. Now we are seeing that the spread-based exposure is a little smaller than it used to be historically, and I'm just wondering whether that trend continues. In other words, does more and more of your fuel exposure relate to this sort of direct interchange exposure versus spread-based pricing? Does that make sense? Or am I still confusing here?

Eric Dey -- Chief Financial Officer

Hey, Ramsey, this is Eric. I think what you said is basically correct. I mean, obviously our spread-based businesses are growing at a little slower rate than the other business are in total. So as the other businesses grow, clearly the revenue in those businesses or that the revenue impacted by spreads is going to continue to get smaller. If that's what you're (multiple speakers).

Ramsey El-Assal -- Barclays -- Analyst

So basically, it's just a mix issue, basically? Kind of a geographic mix issue I must say?

Eric Dey -- Chief Financial Officer

It's completely a mix issue.

Ramsey El-Assal -- Barclays -- Analyst

Got it. All right. Thanks so much. I appreciate it.

Operator

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

Ashish Sabadra -- Deutsche Bank -- Analyst

Congrats. Congrats on such a solid results and the guide. So my question was on the non-fuel businesses, you have some difficult comps there in -- going into '19 and still you talked about this mid-teens growth. And so I was just wondering if you could help us understand how do you plan to overcome some of the difficult comparables in '19.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yes, Ashish, it's Ron. I'd say again, the reason for a bit of deceleration from this year is we lap some pricing, and most of those businesses, it's just volume, right? In corporate pay and Cambridge, it's really all volume. In tolls, it's a bit of mix and a bit of the new things. And in lodging, it's basically volume in the small SMB segments. And so we've modeled the sales and retention rates in those businesses and I'd say we're pretty comfortable all three are heading toward mid-teens plus or minus 1.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's absolutely correct. And then just maybe one quick clarifying question. The guidance -- the 2019 earnings guidance, that does not include any kind of capital allocation in 2019, including any kind of share repurchases that you might make in 2019. I just wanted to confirm that. And it just includes whatever you did in 2018. Is that right, Eric?

Eric Dey -- Chief Financial Officer

That is correct, Ashish. We do not anticipate and we certainly don't plan for any additional share buybacks or any M&A similar to what we do in prior -- what we've done in prior years as well.

Ashish Sabadra -- Deutsche Bank -- Analyst

No, that's great. So if any kind of additional share repurchases that you do this year would be incremental. That's helpful. And congrats, again, on such a solid result.

Eric Dey -- Chief Financial Officer

Thanks, Ashish.

Ashish Sabadra -- Deutsche Bank -- Analyst

Thank you.

Operator

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

David Togut -- Evercore ISI -- Analyst

Thank you. Good to see the 24% growth in corporate payments for the fourth quarter. Can you talk about the underlying drivers of that growth in terms of what specific verticals or products were particularly strong? And then in connection with that, can you give us a status update on ASAP, the new full bill payment automation solution you launched in the third quarter with AvidXchange?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, David, hey, it's Ron. So a few things, I think. One, the healthcare portion of that business continues to shrink relative to the total. It's actually in the plus column. So I'd say that's the first thing. And then the core business, the geographic business and the construction business are just booming way, way up. And then I'd say, third, a couple of the new channel partners, the CSI, the AvidXchange -- we signed Bill.com in the fourth quarter. Some of our partners, I'd say are accelerating their growth, their spend growth. So those would be the handful of drivers. On part two of the question, ASAP, I'd say it's still early days. We're out of the blocks. We've got a couple of teams selling. First set of accounts are on. We've worked out the model, how we're going to price and service. So I'd say that we're up, we're live, we're building. I'd say that the real confidence or interest in the thing is through these partner relationships, through the lenses of seeing how they're doing. So two or three of these relationships that we serve are squarely in this full AP business, so as their processor we see those volume, so we see that the market is receptive to that offer and the sizes of the clients taking that offer. So we're seeing firsthand the acceptance of that. So I think it's just a pacing thing. I think our conviction is that's going to be a big, big deal is there.

David Togut -- Evercore ISI -- Analyst

Thanks for that. As a quick follow-up, Eric, what average fuel price assumption are you using in the first quarter guidance?

Eric Dey -- Chief Financial Officer

Yeah, we use $2.60 across all four quarters, David.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

In North America.

Eric Dey -- Chief Financial Officer

In North America, right, so for those businesses that are sensitive to the movement in the retail price of fuel, leave $2.60.

David Togut -- Evercore ISI -- Analyst

Understood, thank you very much.

Operator

Our next question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

Sanjay Sakhrani -- KBW -- Analyst

Thanks, good evening. I guess, Eric, when you look at the revenue growth versus the EPS, it seems like the operating leverage isn't quite there as much as one would think. Can you just help us think through that?

Eric Dey -- Chief Financial Officer

Yeah, actually from our perspective it's right where it kind of should be, our EBITDA margins running in the high kind of the mid to high 50% range. If you look at the incremental revenue and the incremental EBITDA and our budget next year, probably EBITDA margins are in the low 60s, which is in line with the leverage we would expect from our business. Our fixed costs run approximately two-thirds and variable costs run around a third, so it's in line with the way we would always think about the business.

Sanjay Sakhrani -- KBW -- Analyst

Okay.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Sanjay, it's Ron. You referred to Q4 or '19 in the question?

Sanjay Sakhrani -- KBW -- Analyst

So more on '19. I was just wondering if there is a -- there is more upside to the margin over time, I guess.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, again, if you follow the bridge, it's kind of 10% and 17%, rate normalized, so without the divestments and without the macro. So we think that's decent kind of leverage.

Sanjay Sakhrani -- KBW -- Analyst

Okay, great. And then maybe on M&A, it's obviously been quite a long time since we've -- since we've seen a deal from you guys. Could you just talk about the environment right now and sort of what's hurting or helping your path right now?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I'd say it's kind of business as usual. We've got as I said in the opening remarks, the number of near-in four, five transactions that we're well into, that we're looking at, sitting in our core categories, in fuel, lodging and corporate pay. And so I'd say, hey what's the reason we've taken a one year hiatus, the answer is that when we got to the goal line on some of the deals last year, we just didn't like them enough versus the prices. Some of the prices have gone up in our space certainly pre this correction. And so we just want to make doubly sure at high price levels that the thesis is sound and the returns are there. And so I'd say that it's certainly more likely you'll see us pull the trigger in 2019 given we did last year. But we're -- for all those wondering, we are still in the -- in the M&A business.

Sanjay Sakhrani -- KBW -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from the line of Oscar Turner with SunTrust. Please proceed with your question.

Oscar Turner -- SunTrust -- Analyst

Hey guys, good afternoon. So my first question is on corporate payments and some of the partnerships you just discussed. I was wondering if you can give us some color on what portion of revenue in that segment today is indirect, through partners such as AvidXchange as opposed to direct and, then does more of a partnership approach have implications on pricing power long-term?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah. So, it's Ron. So I'll give you kind of a ballpark. I'd say in our corporate pay, without our FX business, it's in the neighborhood of a third -- 30% to a third of our revenue. Our interest in it that that space has just a massive TAM. It's a massive market and so it needs a lot of coverage, and so we like the fact that there's more marketing pressure from more people that's kind of off-balance sheet doing that. And so we like the business a lot. And then, d, obviously we learn as our partners take different approaches or go after different segments it's obviously informative to us. And then on your question of pricing and stuff, we've obviously got good relationships. We've signed pretty long contracts with those kind of partners so we don't get them into business and then find their ways away from us. So I'd say that generally our channel contracts are longer in term than some of our other contracts in the Company.

Oscar Turner -- SunTrust -- Analyst

Okay, thanks, that's helpful. And then follow-up questions on tolls. Just wondering how we should think about what's driving the mid-teens growth outlook for that segment. Transactions growth there, I guess, which is more synonymous with subscriptions, has remained in the low single digit range. So is pricing likely to remain as the main driver for that segment?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I mean, I guess it's a classic mix I think. I don't have the plan in front of me, but I called out I think 4% volume or tag growth in Q4. My guess is it's in that similar range, kind of 4% to 5% volume growth. There is some inflation, both in revenue and in cost in that market, which would be another few percent. And then really it's the mix of the type of business that we sign up and it's the add-on things that we talked about. So I think I mentioned that with this parking expansion and the fuel expansion we get MDR (ph) now, so without having to change fundamentally what the customer pays, picking up incremental revenue. So I'd say it's those three; volume, some inflation and then basically some spend list.

Oscar Turner -- SunTrust -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Darrin, you there?

Darrin Peller -- Wolfe Research -- Analyst

Oh, guys, hey, sorry about that. Can you hear me now?

Eric Dey -- Chief Financial Officer

Yeah.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Can you hear now?

Darrin Peller -- Wolfe Research -- Analyst

All right, thanks, again. Thanks. Look, just given the strong growth we're seeing in the quarter in fuel, I think it would be helpful if you could just walk us through a bridge from the '18 growth rate in fuel to the '19 organic assumption of 9% to 11%. Just, there's a lot of moving parts. So what's the contribution of each, whether it's the sales process or now the MasterCard growth assumption or anything on pricing? I mean it is clearly a good result in the quarter on it and the trend, the outlook was good. Thanks.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

So let me make sure I got your question. Hey, how are you going from a 9% fuel organic to a 9% to 11% in 2019? What's going on there?

Darrin Peller -- Wolfe Research -- Analyst

Yeah, pretty much. I mean, it was, yeah, and I think it trended up through the year even to the 9%, so I guess just looking at the full year, '18 versus '19.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, so the short story on why 9% versus I think full year around the 5% in '18 is clearly the comps, Darrin, the grow over, right. We finally -- hopefully we'll never speak about the two year old GFN conversion. So we completely lapped that in Q4 and our MasterCard product line here in the US went positive. So instead of being negative against the comps, it turned positive and that thing, we put resources back onto it this year, so that thing is outlooking in almost mid-teens again back -- almost back to the old days in 2019. So the way we would hope you guys think about it is really look at Q4 as the base, not the full year because that's a better view of the comps, and look at it sequentially and say, OK, how you're going to go from 9% to call it the midpoint of what we've given you, 10%, it's really kind of 1 point of acceleration. And it's in -- I'd say it's the comment that one of the guys asked in the beginning, I'd say that the incremental 1% are kind of the new, new things. The new combo, payroll, fuel card and that, the Beyond Fuel, so a bunch of the new things we're working on, the extended network in Russia, there's things going on really in every business that will -- that will ease that thing up, and again, off of the sequential number, it's really going up 1 point, kind of 9% to 10% at the midpoint.

Darrin Peller -- Wolfe Research -- Analyst

Okay, that's helpful, guys. And then just quick follow-up is, is there any large-scale deals on the horizon or RFPs we need to know about that could be opportunities or even risks to your current portfolio?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Are you on M&A or on that partners?

Darrin Peller -- Wolfe Research -- Analyst

No, I'm talking about either partners potentially -- potentially in Europe or elsewhere as well as current existing portfolios that could be in -- looking around.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Got it. So on the -- let me take the second part first. And no. We do a contract review. I would say that there are no significant, call it very large contracts up in the midterm, in the next few years. And then two, I'd say on new partners, I'd say there's nothing close. Then if you said to me is there something that would be signed by anybody else or someone else in the next six to nine months, I'd say no, not that I know of. I mean, like I commented on M&A earlier, I'd say, yes, there are a number of active deals that aren't closed that we're far along on that will either go or not go. So I'd say most likely on door three (ph).

Darrin Peller -- Wolfe Research -- Analyst

All right. Very helpful, guys. Thank you.

Operator

Our next question comes from the line of Tien-tsin Huang with JP Morgan. Please proceed with your question.

Tien-tsin Huang -- JP Morgan -- Analyst

Hi, solid results. I just wanted to better understand, I think you answered to Darrin's -- that you answered to Darrin's question, but the outlook for fiscal '19 is a little bit better than what you previewed 90 days ago. So what got a little bit better? What's giving you more confidence in bringing up this outlook that you have?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Hey, Tien-tsin, yeah, it's a good question. I'd say it's incrementally better. I don't want to get on here and make like in 90 days the whole world has changed. I'd say that everything has inched a bit better. Our sales were a bit better, like came in at 20% that rolls forward. Our retention eked up another point, so and you roll those into the model. So the trends have improved a bit. And then for the other question I think the progress on some of our new stuff has given us kind of a tiny bit more lift here in '19. So I'd say it's those two or three things were -- are incrementally better than when we talked to you guys last.

Tien-tsin Huang -- JP Morgan -- Analyst

Okay. Now it's good to see the retention efforts are showing up here. So on the -- as a follow-up, the 20% growth in the new sales, I feel like I always ask you this, forgive me, can you decompose that for us a little bit? What's selling well? You mentioned 17% in the fuel. Anything else to share?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I mean, I think that was -- the main thing honestly I wanted to call out is, hey, that the Company's total sales have (inaudible) which is all in corporate pay. No, I want to make sure people are clear that the core 45% (ph) of the Company's sales are up 17% in the quarter. It's almost across the board. We're having record sales in Brazil. I called out because of the new channels, a third of all the sales now in the toll business. So the new channels, those were kind of zero virtually when we bought the Company two years ago. Cambridge, I think I called out on its performance. It's just rocking and they've got a big sales plan again in '19. So I'd say it's really generally across the board, mid-teens plus kind of selling going on in every segment. Lodging going good, so it's really -- it's really everywhere.

Tien-tsin Huang -- JP Morgan -- Analyst

Glad to hear. Thank you.

Operator

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

Robert Napoli -- William Blair -- Analyst

Thank you. On same store sales, I mean, you put out a stable number, good number, 1% growth. Is that -- can you talk about that by segment? Where are you seeing any acceleration or deceleration? I mean, a little more noise in the US economy and in some regards with related to the oil industry. Can you just talk about by segment, where you're seeing any strength or any softness?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, Bob, it's Ron. I would say it hasn't moved a lot. We're quoted these numbers over many quarters now, kind of whatever it's been, plus 2, plus 1 the last set of quarters. So if you looked at the trend chart, which I have, it hasn't moved a lot. I'd say the super positive same-store are in places like lodging that's super healthy because of this SMB digital stuff, we're in double digits there of same-store as we're just getting more out of the clients we have. And the large clients like rail and stuff has gotten way healthier in the last 12 to 18 months. So that one is great. The corporate pay has built in same store, right, because expenses grow in companies and the merchant network grows. So a single client might have $20 million of invoices to pay per month, then we're getting 20% of them. We eke it up to 25% and then their invoices go up to 22%. So it has a built-in fundamental client spend and revenue growth. And then I'd say the couple of markets, the Russia, Brazil economies are way better certainly than two years ago and I think still improving. So we have really good high same store in both of those locations. So pockets of strength and I'd say the rest of the stuff, like the US stuff kind of solid chugging along as it has been.

Robert Napoli -- William Blair -- Analyst

Okay, thank you. And just on Brazil. With that market, I mean, it obviously is a little volatile politically and otherwise. Are you -- how are you feeling about that business and that market as a long-term from a growth perspective? And you said you have obviously, you're seeing a little bit better on the ground. But just maybe a little bit of -- about your confidence in building that business and what you expect out of it over the next three to five years.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, that's a great question. Obviously, a market like that is a bit of a mixed bag and has had some amount of uncertainty. I'd say, on the good news front, the political thing looks like it's gone pro business. The economy, and more importantly, the employment numbers have gotten way better again in the last year to two. So I think inflation is frankly down and forecasted to be down. So I think the core economic things there look better certainly than they have in a couple of years. But for us it's really I think the long view that it's a, big, big market with lots of people, and it's a great payments market and it's an underdeveloped payments market and it's a big TAM in the stuff that we do. One of the guys, one of the companies that does it, that what we do called (inaudible) has half of the company's total profits in that one country and so I'd say that we feel from the payments lines that were above, we've got to be there. It's just too big and too early days not to try to go capture some of it. But with that, make sure you guys aren't missing -- we're aware of some of the other kinds of risks and obviously take that into account as we look at things there.

Robert Napoli -- William Blair -- Analyst

Great. Thank you. Appreciate it.

Operator

Our next question comes from the line of James Fawcett with Morgan Stanley. Please proceed with your question.

James Fawcett -- Morgan Stanley -- Analyst

Great, thank you very much. I just had a couple of follow-up questions to those that have already been asked. First, you mentioned in response to Tien-tsin's question that where you'd see some improvement. I guess my question there is, has there been anything particularly in the last 60 days or so as people have gotten more nervous about the economy that tempered your enthusiasm or where you are seeing improvement? Any indications where there could be some incremental weakness perhaps that made you a little less enthusiastic? And then my second question was when you look at -- and you talked about M&A and wanting to be sure, but on some of the deals you might may pull the trigger, but are you adjusting at all your overall targets or strategy around the kinds of acquisitions you might like to do? Thank you very much.

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, on the first one, James, I think -- again to really kind of repeat what I said, I think it's just the incremental. I think our guidance 90 days ago, we're trying to be a bit conservative because we're looking at different compares to the period and I think again over these last sets of days, the things -- all the things that drive the growth has gotten incrementally better. I think I mentioned at the outset that even we were surprised to the tune of, call it, $20 million better in the quarter. So things just got better and our exit rates and stuff look better. So I think we're as confident as you can be that that thing has turned the corner and is heading, due to step up a bit. On your part two, on the deal question, I think, yeah, I think the environment certainly has changed some in the last few years. The prices are higher because there is more people kind of in the game, kind of in our game, which I think has taken prices up. And I think we're focused on some different categories that have maybe more mid-term potential than they do year one potential and maybe more revenue growth potential than immediate accretion potential. And so obviously we weigh all of those things as we look -- as we look at targets and try to balance them, try to not overspend for some hope and at the same time make sure we're buying businesses that have good mid-term prospects, not just one-time profit improvement. So I do think we've moved a bit of the view. And again, I think on the non-fuel categories, that we want to be really sure when we pull the trigger. So we're doing extra work, and if we don't feel confident enough we block buys and things. But I would say again that people shouldn't think just because we spent $1 billion last year that we've retired from M&A and we're going to be buying back stock and de-levering. I would say that we will be buying stuff.

Operator

And the next question comes from the line of James Schneider with Goldman Sachs. Please proceed with your question.

James Schneider -- Goldman Sachs -- Analyst

Good afternoon. Thanks for taking my question. Related to the corporate payments area. A lot of questions on that, but I wanted to ask is sort of different question about your willingness to partner with the different partners you've already talked about over the past couple of quarters versus your desire to make a scale acquisition in this area. Is that something where you're trying to try out different kind of business models and verticals before you decide on a larger acquisition to make? Or how are you kind of weighing the benefits of buy versus partner?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I mean, obviously, Jim, in some of the cases that I called out, they've come to us, right, as the, quote, supplier, as the vendor, as the processor. So we responded. And again, it's been an attractive relationship -- commercial relationship because we have some things they need and they're pouring money into sales and marketing and we can make returns and, as I said, we can learn. So I think our modus up to now have been being responsive to people that are trying to be in the space because we view -- there's plenty of room for a lot of people because the market is big. In terms of transactions, I think like always if we thought whether to partner or not to partner, that there's capabilities or we can telescope time by acquiring something that's always something that we're thinking about, looking at, and obviously it takes two to tango. You need people on the other side that have that interest as well. But for sure, we're -- as you know, we're looking at the landscape. We know everybody in it. And if we think something makes sense to acquire, we will -- we will certainly approach people.

James Schneider -- Goldman Sachs -- Analyst

Fair enough. And then on a related note, is there anything that you see in the 2019 outlook that would prevent you from doing sort of the 20% plus growth rate in corporate pay that you -- the run rate that you've been on, especially given the new partnerships you just signed?

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, again, I think we outlook I think we said, kind of mid-teens. So if you said to me what do we think, our corporate pay business, which is the virtual card business, the partner business and the Cambridge business, I'd say we're comfortable with those numbers. And if you guys recall lots of that business is effectively already sold. So in that -- in that particular line of business, it's much more of an implementation issue in terms of hitting the revenue plan than it is a new sale. So I'd say that we're pretty comfortable generally with the guidance we gave you guys.

James Schneider -- Goldman Sachs -- Analyst

Thank you.

Operator

Ladies and gentlemen, we have reached a lot of time for questions, and this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 60 minutes

Call participants:

Jim Eglseder -- Head of Investor Relations

Ron Clarke -- Chief Executive Officer and Chairman of the Board of Directors

Eric Dey -- Chief Financial Officer

Ramsey El-Assal -- Barclays -- Analyst

Ashish Sabadra -- Deutsche Bank -- Analyst

David Togut -- Evercore ISI -- Analyst

Sanjay Sakhrani -- KBW -- Analyst

Oscar Turner -- SunTrust -- Analyst

Darrin Peller -- Wolfe Research -- Analyst

Tien-tsin Huang -- JP Morgan -- Analyst

Robert Napoli -- William Blair -- Analyst

James Fawcett -- Morgan Stanley -- Analyst

James Schneider -- Goldman Sachs -- Analyst

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