Q2 2019 Earnings Call
Conferencing Centre a conference coordinator will be with you momentarily. Thank you.
[laughter].
Good morning, we enter conference I'd number please.
I don't have the pin number, but the global payments earnings call.
Or.
Okay, you have the spelling of refers and lasting peace.
It's Kevin Laflam K E V I and.
L.A.S.L.A.M.M.E.
Your last name says Oh, yeah.
For Frank L.A.M. for Mary and Premier Echo is that correct.
Yes.
Okay and your company name please.
Era A.I.E.R. J.
It was April <unk> out of India. He echoed offer O'neil April is that correct.
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Your line will be placed on hold until the conference begins.
Organic growth once again this quarter driven by strength in our technology enabled businesses.
This performance coupled with outstanding execution across our markets also resulted in adjusted earnings per share growth of 17% and adjusted operating margin expansion of 100 basis points.
This quarter's adjusted net revenue plus network. These growth also marked an acceleration from a terrific first quarter and we produced these results as our team simultaneously advanced our transformational merger with thesis.
These outstanding accomplishments serve as further proof points that the successful execution of our strategic objectives.
Continues to deliver consistent industry, leading financial outcomes.
We are focused on providing innovative payment solutions to our customers across our distinctive distribution channels and diversified geographic footprint.
And our partnership with thesis will significantly enhance the scale and scope of our technology enabled software driven ecosystem globally.
I will provide an update on the significant progress we have made with Tcs in a moment.
For first I would like to cover a few of the key milestones we achieved across the three pillars of our strategy this quarter.
Starting with our integrated and vertical markets businesses.
We yet again delivered sustained strong organic growth.
Our partnered software business performed well as our new IC partners are exceeding our expectations and contributed to the mid to high teens topline growth we delivered in this channel.
And the competitive differentiation of our integrated payments technologies continues to drive new wins.
Notably we signed a new agreement with together works, which provides a management platform for group of 22 innovative SaaS companies with solutions that span multiple vertical markets, including fund raising recreation and fraternal organizations.
Together works annual payments volume opportunity is currently $4 billion and growing and we look forward to working with our new partners.
As for our own software assets. We also achieved strong results across the portfolio as we leverage our distribution and payments capabilities to scale, our leading SaaS solutions in their respective vertical markets.
Starting with active network booking trends for its core products remain consistent continuing the solid trends, we have recently seen in the business.
We were pleased to sign our largest ever international camp in class manager relationship this quarter.
Advanced MD also had another great result, including its best quarter to date for referrals to Openedge as our streamlined interface and leading product suite.
Is driving strong adoption of our payments solution by physician practices.
Turning to cycle, we successfully deployed our kiosk solution to over 200, Tim Hortons locations in Canada over the last few months and will roll out to an additional 500 locations by year end.
We have also started to deploy our kiosks across Burger King franchises in the United States.
Our kiosk solution allows restaurants to reduce labor costs improve order accuracy and increased sales through marketing and upsell opportunities.
Moving to our ecommerce and Omnichannel businesses, we are making significant progress with our new unified Commerce platform are you CP.
Which provides a single omnichannel payment solution worldwide through one LPI.
Specifically, we made our youth CPE available for testing globally at the end of the first quarter and we just released our new charge backed management PPI. This month.
We are now live with full omnichannel payments across our new infrastructure in Canada and Asia Pacific.
We remain on track to complete the rollout of the new platform to all of our global markets by the end of the year.
Uniquely positioning global payments to seamlessly combine both virtual and physical worlds to serve complex merchant needs.
Several of our most sophisticated multinational clients are streamlining their payment operations by integrating to our new platform and its already driving new marquee wins.
Specifically in conjunction with our partner Acacia, we're expanding our relationship with Spanish clothing retailer desert, while across four continents.
For both in store and ecommerce payments.
Does it while we will leverage our new platform to allow their customers to seamlessly shop across channels globally.
Additionally, we are delighted to have recently expanded our relationship with the premier French luxury retailer into more than two dozen markets worldwide.
This customer will similarly leverage our platform to meet evolving consumer demand and to simplify and centralized their payment operations.
We were also pleased to have recently reached an agreement to expand our omni channel partnership with one of Canadas largest retailers into a new online marketplace offering.
Lastly, we've established a new e-commerce win in Asia with Star cruises.
We have a long standing relationship across Hong Kong, Singapore and Malaysia.
And we are excited to expand our partnership beyond the physical point of sale to provide a full omnichannel solution.
Finally.
We continue to deliver outstanding results in our faster growth markets.
Regarding our newest geographies, we are making excellent progress with HSBC in Mexico since our launch in January 2019.
Our leadership team is in place.
As is our new facility in Mexico City.
And we are continuing to ramp our sales and support organizations.
We are already seeing growth accelerated double digits organically in this market and remain enthusiastic regarding the long term opportunities for this business and across Latin America, as we bring leading technologies into these new markets.
We also announced the expansion of our joint venture with Erste bank into its home country of Austria last quarter, and we are now working to scale our business to capitalize on the favorable secular trends in this market by leveraging our distinctive partnership exactly as we said we would do.
HSBC Arista and in Bursa.
Which recently agreed to join Kaisha and us as a strategic partner in Brazil.
Are some of the largest most complex and sophisticated financial institutions or size globally.
We are proud of the company that we keep.
And we could not be more pleased to partner with these leading institutions.
Highlighting the differentiation durability and extensibility of our position as the partner of choice to leading multinational enterprise.
Turning to our biggest strategic milestone for the quarter, we were delighted to announce our agreement at the end of May to combine with Tcs in a landmark transaction for our industry.
This partnership creates the pre eminent pure play payments technology company at scale focused on Smbs and leading ETF highs in the most attractive markets globally.
The merger accelerates.
Our technology enabled software driven payment strategy and positions our merchant business as the leading provider of integrated payments and ecommerce and Omnichannel solutions globally.
Further the addition of issuer solutions dovetails with our strategy.
Providing mission critical software and processing services for card issuing customers worldwide.
Increasingly in the cloud and on a SaaS basis.
This business is ranked number one in market share in the United States, Canada, The United Kingdom, Ireland in China.
And number two across western Europe .
No Peter has that business at that scale across those markets, which will bear substantially on our revenue synergies.
The combination will also provide us exposure to additional faster growth geographies and enhances our scale and markets overseas, where both companies operate today.
Combined we will have a physical presence in nearly 40 countries globally and will do business in over 100.
The highly complimentary nature of these leading payments focused businesses provides for significant revenue enhancement opportunities.
First inside the United States, we will meaningfully enhance the value proposition for Tces customer base of more than 800000 merchant locations across over 50 vertical markets with our software solutions analytics capabilities and unified Commerce platform.
We will reciprocate by cross selling tces products like vital Pos for retail into global payments merchant base.
Thesis will also add more than 500 sales professionals and will more than double our domestic financial institution base of referral partners.
In sum, we will have the preeminent us merchant business focused predominantly on smbs.
Second outside the United States the expanded breadth of our combined 1300 five partnerships also provides a large untapped opportunities for new issuer and merchant referral relationships.
Tces more than doubles, our existing Fi base globally.
And we have already had fies expressed interest in our ability to cross sell issuing into acquiring partnerships as well as the reverse.
And just the two months since we announced the merger.
It is worth noting that global payments is fully operational today in 31 markets outside the United States.
Something our legacy peers with recent corporate exits flat now and for the foreseeable future.
In that context, it will be quite some time before purchasers of those businesses will be able to effectively cross sell issuing and acquiring services.
As we also mentioned at the time of our transaction announcement.
We expect our merger to open further avenues for inorganic growth internationally, given our unique positioning.
Third we believe the combination of our issuing and acquiring businesses globally.
Will enable us to emulate the benefits.
Of debit network over ownership technologically without the need to actually own a debit network in any geography.
Generating superior return opportunities.
We will therefore be uniquely positioned to develop new products at scale on a worldwide basis, including multinational and domestic and cross border order on us routing.
Enhanced loyalty and analytics schemes.
More effective merchant initially joint sales strategies, and strong customer authentication or sta approvals internally.
On that last point, we expect our e-commerce businesses to benefit from higher authorization rates their own proprietary FCTA that will be uniquely available to global payments.
Fourth and finally, we expect pieces is consumer solutions business.
To provide us with new B to B, BDC, and PDP capabilities and opportunities in new geographies.
As just one use case, we believe we can bring netspend into new markets based on global payments existing acquiring partnerships outside the United States.
And of course here in the US we expect Netspend paycard products to help substantially expand the target addressable markets for Heartlands payroll solutions.
As to the merger itself, we have made great progress and are now tracking ahead of our previously announced plans and expect to close the transaction as early as the beginning of the fourth quarter.
We also successfully closed and our new credit agreement on July nine.
An important milestone in establishing the new capital structure for our combined company.
Our integration planning is underway and based on preliminary work, we have even more confidence in the expected synergies and accretion targets that we outlined in may.
We could not be more excited about the future as we bring together two premier payments companies with strong businesses management teams and cultures that will generate significant opportunities and long term value for our employees customers partners and shareholders.
Now I'll turn the call over to Cameron.
Thanks, Jeff and good morning, everyone.
We are very pleased to report another quarter of exceptional financial results driven by our differentiated growth strategy and ongoing relentless focus on execution.
Total company adjusted net revenue plus network fees for the second quarter was $1.114 billion, reflecting growth of 13% versus the prior year period.
On a constant currency basis, adjusted net revenue plus network fees grew over 15% once again, driven by low double digit normalized organic growth.
Adjusted operating margin expanded 100 basis points to 32.4% and adjusted earnings per share increased 17% to $1.51 cents.
On a constant currency basis adjusted earnings per share again grew over 20% this quarter.
We are proud of these results we remain encouraged by the momentum we have seen in the business throughout the first half of 2019.
We're also pleased with the milestones weve achieved in parallel on our merger with pieces, which I will cover in a moment after highlighting the performance our team delivered globally.
Starting with North America, adjusted net revenue plus network fees was $840 million, reflecting growth of 17% over 2018.
This included an approximately 50 basis point headwind from weakness in the Canadian dollar.
Adjusted operating margin in North America expanded 160 basis points to 34%.
Driven by growth in our technology enabled businesses and continued strong execution across the segment.
Our us direct distribution business once again delivered low double digit normalized organic growth in the quarter led by strength in our integrated and vertical markets businesses, which grew in the low double digits organically.
We continue to see high single digit organic growth in our U.S relationship what channel.
While our wholesale channel declined mid teens consistent with our expectations.
Our recent acquisitions advanced indium Xicom contributed approximately $60 million in the quarter.
Our Canadian business grew mid single digits in local currency, which was largely offset by headwinds from the Canadian dollar.
Moving to Europe reported adjusted net revenue puts network fees grew 9% in local currency or 3% on a reported basis as foreign currency exchange rates remained a significant headwind in the quarter.
Local currency growth was again driven by strength in our businesses in Spain and Central Europe .
Egypt, which grew well into the teens.
We did see a slowdown in organic growth in the UK this quarter as the macro environment further deteriorated with the April Brad good deadline, passing without resolution.
The decline in consumer spending in the UK accelerated in Q2 versus Q1, and we expect this weakness to persist.
Our E com and omni solutions business was another bright spot in Europe .
Again growing mid teens this quarter as our unique value proposition, including the new elements of our U.S CP continues to resonate with customers and drive new wins, such as those highlighted by Jeff earlier.
Adjusted operating margin in Europe expanded 120 basis points to 48.6% driven by consistent execution and the benefits of increased scale in our central European business.
Turning to Asia Pacific reported adjusted net revenue puts network fees grew 7% or approximately 11% on a constant currency basis.
While we saw strong trends across most of the region consistent with Q1.
Local currency growth was negatively impacted by the recent protests in Hong Kong, which is our largest market in Asia.
We estimate these protests negatively impacted growth by approximately 200 basis points this quarter.
These headwinds and those from the foreign currency exchange rates as well as our ongoing initiatives to reinvest in the business adjusted operating margins in Asia expanded 160 basis points to 33.1% due to continued outstanding execution by our team in the region.
As of the ended the quarter, our leverage was below 3.2 times.
During the quarter, we invested approximately $78 million in capital expenditures and returned approximately $72 million to shareholders through share repurchase programs.
Prior to pausing our repurchase program ahead of the announced merger with teases.
In connection with our planned combination with pieces, we successfully closed a new unsecured.
Investment grade credit agreement earlier this month.
Consisting of a $2 billion term loan and a $3 billion revolving credit facility.
This new credit agreement will become effective at the closing of the merger and will replace global payments existing secured credit facilities in pieces unsecured revolving credit facility.
Further the new facilities, we will also reduce our interest rate.
Double our revolving credit capacity and extend our maturities.
We are delighted with the execution of the new agreement, which creates substantial financial flexibility for the combined organization.
The turns achieved highlight the confidence our bank partners, having the new organization.
And position us well to continue to pursue our capital allocation strategy going forward.
Moving to our outlook the momentum in our business that allowed us to exceed our expectations in the first half of 2019 positions us well to achieve our financial objectives for the full year.
We are however, facing incremental pressure from foreign currency and now expect FX to be a more meaningful headwind in the back half of the year.
That said, we expect a strong underlying trends, we're seeing in the business to offset this impact.
To that end, we continue to expect adjusted net revenue plus network fees to range from $4.44 billion to $4.49 billion, reflecting growth of 12% to 13% over 2018.
This outlook assumes foreign currency headwinds of approximately 100 basis points in the second half of 2019, which equates to an incremental headwind of roughly 50 basis points for the full year relative to the guidance we provided in may.
In addition, we expect the recent protests in Hong Kong to again be a moderate headwind to growth in Asia in Q3.
And that the macroeconomic environment in the UK will continue to be weak for the balance of the year.
Notwithstanding these headwinds we are increasing our outlook for both margin expansion and adjusted earnings per share.
Adjusted operating margin is now expected to expand by up to 90 basis points and we expect adjusted earnings per share in a range of $6 to $6.15, reflecting growth of 16% to 18% over 2018.
Please note our outlook does not include the impact of the teases merger that we expect to close as early as the beginning of the fourth quarter.
We could not be more excited about the opportunities ahead together with teases, we will focus on delivering distinctive and differentiated payment solutions to customers in the most attractive markets globally.
We will leverage our competitive advantages and global leadership position to drive industry, leading topline growth margin expansion and adjusted earnings per share growth.
The future is indeed very bright.
With that I will turn the call back over to Jeff.
Thanks Cameron.
We are delighted with our team's accomplishments in the quarter and the first half of 2019, and our outlook reflects the strength and resiliency of our business model.
We were at the forefront of the evolution of our industry, having made significant investments in cutting edge technologies, and defensible and distinctive distribution.
Our transformation over the last six years has driven best in class results not only relative to our legacy peers, but also compared to the card networks ecommerce providers and other high Tech software and SaaS companies.
This outstanding performance is starting to be recognized and we take great pride in noting that global payments was recently highlighted as one of the 10 best performing stocks in the S&P 500 over the last five years.
And we are the only financial technology company to be so acknowledged.
But we are very proud of our past we are simply delighted with our future potential.
Our merger with Tces will accelerate that ongoing evolution and we are eager to finalize our partnership in the near term.
Together.
We will continue to invest in purely payments innovation.
And deepen our competitive moat across each element of our strategy.
We have the very best employees, providing the very best technologies and experiences to our customers in the very best markets globally.
We are fortunate to be in a position. We are in today. This is truly an exciting time to be a part of the new global payments.
Winning.
Before we begin our question and answer session I'd like to ask everyone to limit their questions to one with one follow up to accommodate everyone in the queue. Thank you.
Operator, we will now go to questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
And our first question comes from line of Andrew Jeffrey from Suntrust. Your question. Please.
Hi, Good morning appreciate you taking the question.
Jeff I'm Im kind of intrigued by the comments you made about together works.
And your partnership there I Wonder if you could expand a little bit.
On that and then generally.
Global Payfac strategy and positioning.
In the U.S.
Sure Andrew Thank you I'll start I'm sure Cameron will lead as well so I would step back and say together works is yet. Another example of a recent win in our integrated and vertical markets businesses and particularly in our in our Openedge business. So as we said in our prepared remarks, another mid to high teens quarter Openedge is probably gone three quarters in a row, whatever is with sustained and accelerate growth and to get to Rex is just the latest example of that.
Now more specifically on together works I think the nice thing about that businesses really we and they think very similarly about where the world is gelling as a cloud based SaaS company that is involved in aggregation.
On smaller payments businesses I listed some of them in the prepared remarks.
And the interest and providing more value and volume based scale economics.
To those related related businesses.
Those are areas that touch on things that we think we are already good at examples include University that education stuff you know Andrew that we have a significant.
We have a significant role in and we are delighted to yet another smart sophisticated.
Buyer chose us as their provider of payment services going forward also noticed in our I noted in our prepared remarks that there's about $4 billion of volume at together works today growing at a good rate and we're just getting going which makes us feel really good about the trajectory going forward and reminds me a little bit of our calls in February may where we talked about Tyler technologies and.
And some of the other folks on your second question regarding payment facilitation.
Prior to Tcs and I'll come back to post Tces in a second but certainly priorities as I think we already have one of the largest payment facilitation businesses in the world as you know Andrew for many many years going back to the HSBC UK days Paypal has been a customer of ours in most of the markets Europe and Asia Pacific in particular around the world for on many years in fact, I think in October November Cameron Lee, we announced that we ever knew that relationship for another period of years with them with Paypal. So outside the United States I think we have a terrific payment facilitation business. I also noted in my prepared remarks that we decided from our key partner in Canada for more marketplace activities through our unified Commerce.
Product offering which is coming.
In the immediate term so I think in most markets. We've got a great payment facilitation business, but we're very excited about in conjunction with Tcs is the ability to extend that more directly into the United States market or tces through Propay has a very good facilitation business and the ability to get access to some of their disbursement related technologies think of things like Uber and Lyft and that kind of thing on Tces. For example has Mary Kay in the United States market. So we really view payment facilitation Andrew is something we've been in for a long time and are very good at so we think tces takes it to the next logical layer and level, which is to say a complete rounding out of our product suite, particularly here domestically in the United States and I think as we announced at the time of the merger. We believe will have on the largest e-commerce and omni channel businesses in the world at about $900 million estimated of revenue and of course payment facilitation is a big part of that.
Thank you very much.
Thank you. Our next question comes from the line of David Togut from Evercore ISI. Your question. Please.
Thank you Andy and good morning.
You highlighted a number of new cross selling opportunities with Tcs.
And increased conviction in both the revenue synergy and cost synergy target.
Is there anything in particular that thriving that increased conviction.
Two months post deal announcement.
Yes, David its Jeff why don't I start I know Cameron is going to be wide, joining as well what I would say is as we mentioned both in our press release in our prepared remarks that.
We started our preliminary integration work and as you know most.
In most deals you make assumptions about where you think.
Benefits are going to be and as weve.
Gotten further into our integration work and we certainly feel more strongly about our ability to cross sell more effectively let me just give you a number of examples that let me start here domestically in the United States with the merchant business I think heartland and we talked about as David Our last fall has done a fantastic job in the restaurant vertical market Thats, particularly true with Xinyuans icon, but as we talked about David in May Harbin Register.
Here in the United States and hardwood restaurant are very significant initiatives in combination with zini. All we think we have the broadest base of restaurants solutions hardware and software.
Front end middle end and back of the house that anyone has an any of our markets worldwide.
That is not an area while restaurants is certainly something that tces does on the merchant side. We think we've got fantastic depth of market to bring those solutions into teases. Conversely, we think thesis has the same thing in the case of vital Pos which is focused on retail again, a market that we're in but not in the way that we're in with Heartland Register in Harbin restaurant show on having spent some time with the Tcs folks in the teases merchant folks in particular post the announcements we're very excited about the ability to bring heartland vital point of sale into the heartland.
Until the global payments based here in the United States and secondarily stepping back theres been a lot of dialogue, which im sure Youll appreciate about strong customer indication or Sta, particularly in Europe as the September date.
Approaches so global payments today is well positioned for that day theres been some conversations you know about having a date rolling over a period of 12 months, having said that though on our thesis going into the partnership announced at the end of May which has the ability to combine tces issuing business, which has a tremendous positioning in the United Kingdom in Ireland in Western Europe for purposes of the EU, our daily to combine that issuing business with our inquiring businesses at thesis, we had going into the announcement for purposes of higher authorization rates on now that strong customer syndication is upon us and I think the initial reactions from from that thesis over the last couple of months since the deal announcement on within the four walls of pieces to global payments have been positive.
So I think Dave what I would say is you have an idea we head into these things, but the last two works to two months of integration work.
Within the two companies and provide us with more conviction.
On how real those synergies really are.
In immediate and intermediate term.
Yes, David It's Cameron I'll, maybe just build on that to talk a little bit on the expense side as well. We continue to believe that there is over $300 million of expense energy opportunity by combining the two businesses and to Jeff's point the more opportunity we have had to spend with our colleagues at tcs to explore those opportunities in greater detail. The more conviction, we have as it relates to our ability to achieve that target at a minimum but I would say more importantly, the more conviction we have regarding the ability to continue to scale margins as a combined business thereafter.
As I said, when we announced the transaction back at the end of May we're very focused on taking whatever action, we're going to take in a relatively quick timeframe.
So that we can achieve the expense synergy target we have positioned the business on a combined basis to be successful in the marketplace, but really continue to focus on growing and expanding because we believe we'll have the best rates of topline growth in the industry going forward as a combined company that said, we see a long runway for us to continue to scale margins effectively by driving more efficiency in the business over the course of time, even after we achieve that first layer of synergies that were targeting for the business at that over $300 million level. So I'm, particularly excited about the ability to drive margin expansion in the business at very attractive rates for a long period of time really through the benefits of increased scale and increased economies of scope in terms of how we operate globally.
Thank you just as a quick follow up Jeff you announced a number of new and ongoing initiatives in Europe and you are really the only merchant acquirer that has had high growth and bank Jvs in Europe .
How are you thinking about expansion of bank jvs into new countries in Europe , you mentioned Arista in Austria, let's say versus inorganic growth opportunities in Europe .
Hey, David I think theres, a little bit of both their let's start with the bank Jvs I, certainly think that while we've always been pursuing bank jvs in all of our geographies I certainly think that the partnership a piece that would piece as positions us better than anybody else.
Going forward I think to have a poor strategic products of issuing combined with acquiring on in those markets is absolutely critical to our I think that business is evolving over a period of time that also ties into the inorganic point as we've mentioned before there are many transactions, we look at around the world, but especially for these purposes in Europe that have issuing elements and acquiring elements and historically global payments, we'll look at those and say well I'm. Good at the acquiring but I don't really have initially scale presence to marry up with the issuing assets in those targets pieces of course, we do the same thing they would look at those businesses in Europe and they would say we are delighted with the issuing opportunities but were not in acquiring on outside the United States. So certainly as I think about organic but also inorganic opportunities in.
In Europe , the combination of issuing acquiring I think may puts us in an unrivaled position relative to really anybody else.
To be a strategic partner to those onto those to those assets and I'd say both companies have a long history.
Our durable extensible bank partnerships worldwide as I mentioned in my prepared remarks.
On the combination pieces in global payments results in.
A sophisticated financial institution based at 1300 at buys on around the World and I would tell you that the durability extensibility of those partnerships is unmatched.
Relative to all of our directors.
Thanks, so much and congrats on the strong results.
Thanks, David Thanks, David.
Thank you. Our next question comes from the line of Bryan Keane from Deutsche Bank. Your question. Please.
Hi, guys wanted just to ask about the UK slowdown we've heard piece to make similar comments could you just maybe quantify the impact to you guys maybe percentage of exposure.
And then Jeff you did touch on as CA.
Just your latest thoughts there do you think that will also weigh on European results as that.
It goes through regulation over the next 12 months.
Hey, Brian It's Cameron I'll kick it off and then maybe turn it over to Jeff on the CIA side. So as it relates to the UK market as I said in my prepared remarks, we did see consumer spending slowdown in the second quarter relative to Q1. If you look at visa data, which I think reflects I think fairly accurately what we're seeing in the marketplace. I mean consumer spending declined in the first half of the year something like 1.11, 0.2% something in that in that range. So we're obviously seeing the impacts of Brexit sort of manifest themselves in consumer confidence in the market. We continue to grow in local currency in the UK. So we're certainly pleased about that we continue our trend of growing above the rate of market growth.
In the UK, but obviously, it's not at the same level that we had been growing in the 2018.
Timeframe or even in Q1 for that matter the UK for US today as you know on a pro forma basis for teachers is probably 4% to 5% of the market of the company excuse me as a revenue manner. So it's not a particularly big exposure for us going forward.
But I think we're continue to be well positioned in Europe overall as I commented on in my prepared remarks, Europe overall grew at our targeted rate of growth again were well diversified across the continent. The trends, we're seeing in the UK really havent.
I'd say infected the rest of Europe in our cross border business in Europe .
For E Com Menominee remains very strong in a tailwind for our growth in the overall region. So I think we're well positioned in the region and we're obviously prepared to ride through sort of the choppiness in the UK market that we expect for the foreseeable future.
I'll ask Jeff maybe a comment on the FDA.
Question that you asked yes, sure. So ideally I would add to what Cameron said on the UK as you probably have one of the best new sales periods in the first half of 2019 with new sales in the UK for us at the very significant percentage well in excess of our historical numbers. The last number of years year over year. So as Cameron said, we like our positioning there.
And the rest of Europe seems to be.
Separate in terms of its economic growth you can see that reflect our numbers on EBITDA I think these said the same thing Brian that the regulators I think smartly, even though the rule becomes effective in September of 19.
Have provided some guidance that as long as people continue to make progress.
That that will be rolled out really over a 12 month period from September 19.
I spent as through September of 20.
So I think that will be less of an issue that otherwise might have been speaking for global payments I would say, we're really well prepared so I think the way to think about it is not so much. How these is doing or mastercard, our global payments, but instead really the small bank issuers and the small merchants and.
The tertiary.
Gateways and alike, I think thats the area of particular focus it's not something that were altering our view on.
As it relates to what our E Commerce Omni channel business is going to go is going to grow at for the remainder of the year as Cameron just finished saying that business is coming off of a really good.
Another really good quarter into the mid teens consistent with the performance that we've seen over the last three or four years. So certainly something we're focused on we think we are ready for it I would say that over the next 12 months, particularly since pieces will close a bit earlier now we're in a unique position I really mean unique because the.
The presence of pieces on the issuing side in the United Kingdom in Western Europe in Ireland with the business that they have marrying that issuing solution presence with the acquiring solution that global payments has in those markets will allow us as I said I prepared remarks to affect our own unique and private sta solution. So our ability to avoid.
Any issues, but importantly, our ability to avoid started to provide value added services to our customers.
By key by keeping SK authorizations within the four walls of mobile payments and Tcs is a unique value proposition that we are going to have over the next 12 months is that we will also becomes effective so to be honest, Brian actually think it speaks to our strengths and further positions global payments in and Tcs as the partner of choice to merchants and financial institutions and really nobody else has that if you think about the nature of their businesses.
Okay helpful solid results. Thanks.
Thanks, Brian .
Thank you. Our next question comes from the line of Glenn Greene from Oppenheimer. Your question. Please.
Thanks, Good morning, Congrats on the results.
I guess the first question Jeff in your prepared comments talking about the revenue synergy opportunities you talked about the debit opportunity which is somewhat.
It's different from what I've heard before but maybe you could just elaborate on what you sort of math from the key opportunities. There and then the follow up question would be capital allocation thoughts once the deal closes.
Given your sort of significantly improved capital position actually on your strong currency.
Star currency, so kind of just thinking about your priorities in terms of doing larger software deals versus international Bank JV, you can just sort of thoughts on capital allocation post the deal.
Sure Glenn I'll start in the first line of Cameron wall or address the second question. So on the first one I listen I think our philosophy on meringue issuing with acquiring.
And not needing a gateway to do it is not all that unique to us until that new to us I think it's similar to what we said in may So some of the examples I gave I just finished talking to Brian in response to Brian's question about strong customer dedication our ability to validate as a broad matter those transactions without having to go outside the four walls of global payments and Tces is unique to us and Thats one of the things I meant when I talked about marrying issuing with acquiring the difference with us Glenn versus everybody else is we don't need to own a debit gateway to deal. It instead, we do a technologically. So if you look at the construct of new Pfizer or new fidelity the way they get assets and by the way they only get at in one market.
States and the reason for that is that's where those debit gateways are physically present, so number one we don't actually need to own at gateway and compete with the car brands were very good at doing that in order to go into effect a solution that I'm, describing instead, we do a technologically hence the source of my commentary about providing superior return capabilities.
For our shareholders and for our customers because we actually do it through tech would actually need to own online processing in its own right. So in that instance, and Thats, what I was referring to Glenn that is distinctive number one number two we can do this globally by how we do it because of the presence that Tcs has in North America in Asia and in particular for these purposes in Europe as it relates to things like strong customer authentication, we can emulate a lot of the value Thats provided by the network by doing within the four walls of global payments and Tces globally. If you think about new Pfizer to new fidelity. Those are only based in the United States for purposes of debit services.
And Gateway services. So I think we'll have a double advantage of a one I think it's a better mouse trap as it relates to construction of the solution and number two its worldwide and scope, particularly in markets like the European Union were Sta is already upon us and that's really what I was trying to trying to refer to Cameron you want to address that yes going on capital allocation. So just a couple of comments maybe to kick it off first of all you're right in terms of how the combined business will be positioned upon closing, we expect to be roughly two and a half times levered on a pro forma basis, we expect to have an investment grade balance sheet generate in the neighborhood of $3.5 billion a year of EBITDA on a pro forma basis into an $8 billion of free cash flow again on a pro forma basis are very well positioned as it relates to the I think scale and financial flexibility that the combined business is going to have to continue to pursue its capital allocation priorities.
I would say however, our first and foremost priority upon closing the transaction is going to be to ensure that the combined business is coming together that we're well positioned as a go to market strategy that integration is going smoothly and there were executing on in delivering on the commitments that we've made as part of the merger with Tcs. However, obviously as time passes we're going to have a lot of capacity to continue to pursue that disciplined capital allocation strategy that we have historically and I think you should expect that it's going to be focused on many of the same things that we have been focused on historically, obviously, we're very bullish on our software driven payment strategy. So clearly, adding more vertical software businesses that fit the pieces that have the right Nexus between obviously.
SaaS software components, and Nexus with payments that allows us to grow both the software side of the business and the payment opportunity to monetize that effectively as a combined business will be a core part of the capital allocation strategy I think to Jeff's point earlier, we do continue to see opportunities, particularly with our new issuing capabilities to combine those with acquiring capabilities to pursue.
Additional joint ventures, and acquisitions outside of the US, particularly in Europe and I Am for example, where we think those capabilities will be distinctive in terms of our ability to compete for assets in those markets and obviously that will continue to be part of the capital allocation strategy as well.
And then lastly, I would say and I want to reemphasize, our commitment to maintaining the investment grade balance sheet going forward, obviously that is something that as a combined company will pride ourselves on having and we certainly remain committed to maintaining that going forward and maintaining leverage at a level that will support that investment grade balance sheet.
But that being said, we obviously will have ample capacity I think to pursue a capital allocation strategy that allows us to effectively do the things we've been doing now for the last five to six years in terms of growing and expanding the business globally.
Okay. Thank you.
Thanks Lynn Thanks, Glenn Thank you and our next question comes from the line that Ashwin Shirvaikar from Citi. Your question. Please.
Hi, Thanks.
Hi, Jeff Hi, Cameron.
Hi.
Hey, good stuff here.
I wanted to start with asking.
Yes, the highlight that Jeff did the multinational and expanding relationships with.
HSBC Chi share or staff kind of assessing on the complexity and scale of these.
Then clearly linking this to the opportunity as it relates to pieces. The question is at knowing how large even a single additional one off these sorts of relationships can become.
It would seem to eclipse the revenue synergy targets you have so so.
What's your interest level in mining this opportunity.
Immediately is that really factored in.
I just want to get a sense of.
Prior to privatization wave this particular opportunity fits nicely.
Yes, it's a great question Ashwin I would say just beyond the revenues there is the lowest hanging fruits right here in the United States with the merchant business I gave a few examples in response to I think David's question.
Earlier. This morning. So if you just look at the area most direct overlap through the United States and merchant their products and services that Tcs has I gave vital Pos as an example on Aloha NCR certifications with the another one that global payments and Heartland are not as well positioned in today Conversely.
There are things that heartland has apartment registered or things that openedge has in our 70 vertical markets with openedge.
That tces doesn't have today directly or hasn't complimentary fashion. So as it relates to revenue enhancement acceleration. There is a lot of low hanging fruit right here outside the complexity that you just referred to as it relates to those multinational partners. There is a lot of overlap and a lot of ability to from a product from a technology point of view to drive incremental revenue right here in the immediate term I think cameras alluding to this when you talked about a lot of the things being front end loaded rather more traditionally kind of middle and back end as you might see in other and other transaction. So I think thats the area Thats right down the middle plate now if you step back further to your point and you say well what else can we do so one example would be in and global payments is doing this already but pieces is absolutely going to help immediately is already are pitching you see all this stuff in the newspaper coming our large at buys here domestically have said, we don't think we have the ability to sell cross border multinational E com and omnichannel corporate customers that the banks that we like to have today, so here's an issue.
Ample of large mncs or global payments is already pitching this stuff today with our unified Commerce platform I talked about at the beginning of my prepared remarks, while Theres no doubt whatsoever, My mind, and that's straight sales pitch and in my mind that teaches helps accelerate that strategy immediately so pieces can provide additional evogene revenues and to more multinational advised that we don't have and thats a sales pitch that we're already executing on today. So I would say notwithstanding the complexity of some of the folks that you. Just mentioned there is no doubt in my mind that there are immediate opportunities to help accelerate revenue enhancement. In addition to some elements of the merchant business. The last thing I'd point out on the same pieces sign I think its immediate to may be immediate to medium term.
Area is a net debt so I want to make sure we discussed that which is to say that their merchant business at Tcs and their netspend bees business at Tcs is a us only.
Business today for historical reasons, while Cameron Highway there were a number of markets over the last number of months Theres No reason than many of those businesses merchant, we already do overseas, but let's just take Netspend for this example, theres no reason that business can exist in markets outside the outside the United States. So certainly with our footprint with the combined company scale and scope our ability to bring netspend on prepaid to markets outside the United States is something we're very optimistic about and by the way that's not a two year undertaking that's something I expect to see happen in the next 12 months. So I think very different than some of the other transactions that have been announced.
There really is a fair amount of confidence in our near term ability to affect many of the strategic things on the revenue enhancement side that we've we've described it ashwin, maybe just to build on that a little bit further as we think about the revenue synergy potential in the business all the things that Jeff described the generally think about as organic things that we can do or start to do day, one as a combined company to your point given the new capabilities that we'll have with teases combined with our existing acquiring capabilities, particularly outside of the us the opportunity to leverage that into additional markets or additional joint venture opportunities that may require some level of investment I really think of that as incremental frankly on top of the revenue synergies that we've targeted generally because there's investment that is going to go behind the need or the ability to expand into a new market or to establish a new joint venture and we have as we have historically so to your point to the extent that we are able to do that yet on the topline that may eclipse. The overall revenue target that we've established as part of the deal, but I really think about that as being largely incremental to.
To sort of the organic opportunities that Jeff highlighted in his prepared remarks, and then again obviously in his response to your questions.
Got it understood. Thank you for that and then the follow up is.
On the earnings Clinique themselves.
You quantified the incremental FX impact on revenues, but you also absorbing and impact on margins was still raising.
Margin guidance can you comment on what.
So what you are absorbing from a margin standpoint.
Yes, it's a good question Ashwin, so I would say for the full year I expect currency to be anywhere between a 20 to 30 basis point headwind on margin and probably 400 basis points on the bottom line. So yes, we've quantified it as a top line basis, largely because again, we've maintained the current revenue guide.
Which really is a function of the incremental revenue headwinds from foreign currency offsetting the strong momentum going in we have in the business. So we still feel good about the overall revenue target, but obviously the execution, we've been able to achieve over the course of the year fuels positions us well to achieve.
An increase in our overall expectations around margin expansion and earnings per share for the full year. So the way I generally think about it is the earnings guidance, 16% to 18% Interestingly, that's our roughly our cycle guidance in terms of our earnings target growth, but thats, an absorbing probably three to 400 basis points of currency in earnings so really on a constant currency basis, that's north of 20%, which I think is a really strong number as an earnings matter for the business.
Got it thank you.
Thanks, guys. Thanks Sachin.
Thank you. Our next question comes from the line of David coming from Baird. Your question. Please.
Yeah, Hey, guys. Thank you and I guess my first question North America, It looks to us like on an organic constant currency basis accelerated maybe 1.5% to the strongest it's been in about two years I think we had about 9.5% organic constant currency and I know thats a function of wholesale keeps getting smaller Canada was good and us direct is good.
I'm wondering you actually hit easier comps in the back half is that type of growth sustainable and it is us direct.
Continuing I mean, it's obviously taking share within your North America segment, but is that strong level pretty sustainable and maybe even accelerating in the back half.
Yes, David Cameron So I think your math is pretty good to be honest with you I've got North America kind of normalized constant currency growth in the quarter of about 9.5% pretty close to what you. What you suggested an x. wholesale that's almost a point higher so closer to 10 and a half which is really at the high end of our cycle guidance. Obviously, the U.S direct business is north of that which again reflects continued very strong performance across our integrated and vertical market channel as well as our relationship channel continues to perform really well. So I think the short answer to your question is yes, the back half expectation sitting here today is that those trends.
Persist around those same levels I think we feel good about the momentum we have in the business and notwithstanding the incremental currency headwinds were absorbing in revenue. The way, we're really offsetting that is strength in the North America business and more particular strength in the U.S direct channels that continue to help us absorb incremental FX in regions outside of the U.S. So the long and short of it is yes, the expectation for the balance of the year is that this level of performance in the North America business persists and we continue to feel good about the momentum that we have as we enter into Q3 and Q4 as as a revenue matter.
Great. Thanks, I guess, just the one follow up it looks like free cash flow in the first half was a little lighter than normal does that mean, you get a big catch up in the back half and have just a ton of free cash flow kind of to use for buybacks or whatever else in the back half.
Yeah, and I would look at it ex the timing items that we've sort of highlighted on the schedule because I think thats the best representation, it really cash within the business and available for US and is tracking close to half a million dollars for the first half. So we're on target for the billion dollar target we have for the full year, there's a lot of noise in that sort of timing items. Some of it is.
Between reduction of liabilities, but it's coming at a restricted cash because we're holding customer gas have been rolled out in the next quarter or so it's the best way to look at is sort of ex the timing items. The way that we've highlighted on the trended financial statement, that's really the cash within the business and available for us to utilize.
Great. Thanks, guys good job.
All right. Thanks.
Thank you and our final question comes from the line of Steven Kwok from KBW. Your question. Please.
Hey, guys good quarter and thanks for squeezing me in just two quick questions one around the U.S. wholesale market no on improved a little bit, but I believe pieces has a little bit of the wholesale market as well what's your thoughts on that is that going to be a bit of a run off as you integrate pieces as well and then second question is just around the interest rate environment, given the outlook for lower rates is there any further potential to lower your debt cost. Thanks.
Yes, Stephen it's Jeff I'll start on the U.S wholesale intra camera will comment on the rate question. So what I would say is if you back up and you look at how we think about it.
Right when I came to global payments the us wholesale business is probably 50% if not more of the us business.
Number one number two we also lack in addition, the math we also lack the diversity of distribution. So with the exception of our gaming business with the exception of 18, we bought it in 2012, we didnt really have a lot of direct sales in the United States away from the wholesale business I think those two things really drove the strategy that we've been talking about for the last four or five years, which is to say an emphasis of the direct business and less of an emphasis on the health of our business. We are no longer in that position. So we have plenty of direct distribution on a combined basis with tcs the wholesale business by about 5%.
Of the combined company, but probably most importantly, Stephen we have a lot of debt to direct distribution at global payments and certainly at adhesives. So no I don't think about it the same way as I thought about it six or seven years ago, because those two issues, we have that predominate loan payments when I got here, which is to say lack of diversity of distribution and concentration are not issues in your global payments have today, but especially for these purposes. They are not issue is that teachers in global payments lab. So I certainly think we feel very definitely about that I'd also add in there that will eliminate historically going back six or seven years ago had a lot of concentration among very few customers in the ISO business thesis doesn't have that either so.
I think going forward to much better mouse trap overall with the combined companies and I don't think we would approach at the same way rather I think we'd look at it.
Openly and think about what's the best thing for the combined business.
And Stephen on your re question I'd start by saying of course is not lost on US that we are in a very attractive rate environment in general and I'll start with the credit agreement that we executed earlier in July we were delighted with the outcome of that we priced our revolving credit facility and term loan area given our expected credit rating at LIBOR, plus 137, and a half basis points, which is obviously an improvement over where our pricing is today and interestingly where teachers is as well. So we feel good about having gotten that aspect of the permanent capital structure in place at very attractive terms. The remaining aspect of the capital structure that we need to put in place. Prior to closing is really an expectation around about two and a half billion dollars of senior note offering that we expect to execute here over the coming months as we lead up to closing of the transaction and naturally to your point, we recognize that the rate environment in which to get that done is pretty attractive for us today. We also recognize that given the mix of the business geographically.
We have received there could potentially be opportunities for us to take advantage of even a lower rate environment in the UK and Europe that would allow us to lower the overall cost of debt for the pro forma business as well so more to come on that as we continue to execute against our plans to establish the permanent capital structure for the combined business between now and close but I would say certainly the rate environment that we're seeing in the execution, we've been able to achieve thus far gives us a lot of confidence that there's some potential upside as it relates to the accretion expectations. We have for the transaction on the yields of better than expected financing rates.
Great. Thanks for taking my questions.
Thanks, David.
On behalf of global payments. Thank you very much for your interest in our company and thank you for joining our call. This morning.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.