MasterCard Incorporated (MA) Q2 2013 Earnings Conference Call July 31, 2013 9:00 AM ET
Barbara Gasper - Head of Investor Relations
Ajay Banga - President and Chief Executive Officer
Martina Hund-Mejean - Chief Financial Officer
Noah Hanft - Chief Franchise Integrity Officer, General Counsel and Secretary
Craig Maurer - CLSA
Jason Kupferberg – Jefferies
Moshe Orenbuch - Credit Suisse
Darrin Peller - Barclays
Smittipon Srethapramote - Morgan Stanley
Chris Brendler – Stifel
Glenn Fodor - Autonomous Research
Bryan Keane - Deutsche Bank
Julio Quinteros - Goldman Sachs
Rod Bourgeois - Sanford C. Bernstein
Bill Carcache - Nomura Securities
David Hochstim - Buckingham Research
Tom McCrohan - Janney Montgomery Scott
Tien-tsin Huang - JP Morgan
Welcome to the MasterCard’s Second Quarter 2013 Earnings Conference Call. My name is Glenn and I’ll be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I would now like to turn the call over to Ms. Barbara Gasper, Head of Investor Relations. Ms. Gasper, you may begin.
Thank you, Glenn. Good morning, everyone, and thank you for joining us for a discussion about our second quarter 2013 financial results. With me on the call this morning are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer. Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q&A session. Until then, no one is actually registered to ask a question.
This morning’s earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website, mastercard.com. Both the earnings release and the slide deck include reconciliations of any non-GAAP measures to their GAAP equivalents. All of these documents have also been attached to an 8-K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for one week through August 7.
Finally, as set forth in more detail in today’s earnings release, I need to remind everyone that today’s call may include some forward-looking statements about MasterCard’s future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filing.
With that, I will now turn the call over to our CEO, Ajay Banga. Ajay?
Good morning, everybody. We are very pleased to report EPS growth of 23% for the second quarter. Our net revenue growth of 15%, operating expenses grew 5%, and we continued to execute on our global strategy and navigate through what we all know is a somewhat uncertain economic environment.
So, let’s take a look first of the U.S. consumer spending was up last quarter. Retail sales growth was better than expected. Housing indicators continued to show signs of recovery. Our spending pulse data for the second quarter showed a growth in U.S. retail sales ex-auto was 4%, that is over the same quarter of the prior year, and that is up from 2.6% as the same number for the first quarter. So, contributing to the growth was a steady improvement in consumer confidence and some stabilization in the employment levels in the country. Our own U.S. business reflected these improving trends with 6% volume growth, up from last quarter’s 4% growth.
Moving on to Europe, the environment is somewhat similar to what we saw. Over the last several quarters, there are a few upbeat notes there. Economic trends were similar for the UK and for parts of Continental Europe. During the second quarter, consumer confidence increased there. Business sentiment was a little weak in the second quarter there. Although recent PMI studies indicate that business sentiment now may also be turning up. In spite of those mixed economic signals, we are still seeing opportunities to expand our business and take advantage of that secular shift from cash through electronic and that shows up in our solid second quarter volume growth of 14% in Europe.
In the Asia, consumer spending in the second quarter was on the rise. In the majority of markets, consumer confidence levels are doing well across the regions with key markets like Korea and Japan being marked improvements. Business sentiment across the region is mixed and that's kind of due to the lingering concerns about the effects of the sluggish Chinese and European markets may have on the broader Asian export dependent economy. Our business in the region however continues to do well. We had volume growth of 21% in Asia.
Latin America, consumer confidence in both Brazil and Mexico is somewhat challenged for all the reasons you read about and expectation for GPD growth in Mexico have recently been lowered. But we are still growing our volume in Latin America at almost 17% but clearly we are watching the wider economic trend there very carefully. So before we go over to some recent business highlights, I thought I'd spend a minute on the legal and regulatory front and particularly with regard to the U.S. Merchant litigation, the merchant opt-out period ended in late May and as most of you already know about 8000 merchants decided to opt-out of the cash settlement. The represents just marginally over 25% of the total purchase volume over the settlement's time frame.
The defendants as a group have the right to terminate the settlement agreement because the volume threshold of 25% was exceeded, but elected not to do so. We expect most of the larger merchants who opted-out will file separate actions to recover damages and many of them have already started to do so. The final approval hearing is scheduled to begin on September the 12th. We remain confident that the settlement will be approved. We are also pleased that the Canadian Competition Tribunal recently upheld our no surcharge Honour-All-Cards and No-Discrimination rules in Canada.
And in Europe, I know that Javier and Noah were on a call with most of you last Thursday to discuss the EC's proposed legislation.
So I'm going to spend less time on that, but I do want to offer a couple of thoughts that I have in my mind on the topic. We partner with governments around the world in many areas related to electronic payments but there will be times when the interest of some of our stake holders require us to raise concerns of our proposed action, this is one of those times. We support the European Commission’s gold of a secure, efficient, competitive innovative European payments industry. We believe that they have made a good start towards recognizing the importance of a level playing field. It also appears that there is actually potential to further open up and get competition in place for domestic processing.
However we remain concerned that some of the proposed legislation could have unintended consequences of hindering competition, and innovation, and we remain concerned that it could be harmful to consumers and small merchants in Europe. And so in the upcoming debate as this legislation, the proposed legislation winds its way through the process, we are going to engage all participants in the process. We will try and ensure the best possible outcome in the best possible way.
Finally I want to reiterate Javier’s confidence that our model, our business model will adapt as necessary to allow us to compete effectively and continue to provide innovative payment products and services that our customers want to offer, consumers want to use, merchants want to accept and that's where we are focused on.
So moving from there on to some recent business activity. You will get a chance to see a lot of things that are invested in September. So I’m going to focus our progress here around a few key themes and keep in short.
During the quarter we continued to sign new agreements, supporting the expansion of our credit and debit business that's the first theme including the following examples. In Europe, Danske Bank, the largest bank in Denmark will be issuing MasterCard consumer debit, credit, and commercial cards in 10 countries. And together with what we did with Fred (ph) Bank, Nordea as our wins (ph) there, we expect to grow our total market share by 50% in the Nordic and Baltic region over the next five years.
In Korea we have two new debit card wins to help lock in our debit market leadership position. First is the (inaudible) Card the recent spin-off of the card division of one of Korea's largest retail banks and they are now issuing platinum debit cards with us. We also recently signed an agreement with Hana SK that will further increase our dominant share of their debit portfolio. In the U.S., we continued to aggressively pursue all opportunities in the consumer credit and co-brand space as they arise. We’re pretty confident and are showing regular progress as and when they come up and we can announce them.
Moving to cross-border, which as you know is an important part of our business that's the second theme. Let me give you a flavor of some of our new travel and affluent (ph) programs around the world. In the UK our access prepaid business recently launched four new multi-currency cash passport programs, all of which are available online. One example is British Airways launching their Executive Club Cash Passport card, which is capable of having up to seven currencies loaded on the card.
South Africa, (inaudible) bank in South Africa launched the country’s first re-loadable prepaid travel multi-currency card. This allows for four currencies to be loaded on to the card. And one of the largest financial institutions in the Middle East, the Riyad Bank in Saudi Arabia just launched a gold-plated World Elite card for their private banking client, and these benefits include everything from unlimited lounge access at our cross-border rewards program and the like.
So, the third theme, leading the transition to digital payments, we are focused on creating better shopping experiences for the consumer, more value for the merchant. And then I will give you a couple of examples. First, MasterPass Digital Wallet, that rollout has now expanded to four countries. Canada launched the past quarter. The UK is launching as you read in the media as we speak. With the addition of web.com, that’s a provider of internet services for small businesses in the U.S. and Canada, this wallet is now accepted at more than 20,000 merchants globally. In Singapore with the addition of SingTel’s recent launch of their mCASH program, all three telcos in Singapore, SingTel, StarHub, and M1 now have wallets MasterCard as the only open loop payment card option.
Last theme, IPS, or issuer processing platform for debit, ATM, and prepaid. As you know, IPS enables our consumers and our customers rather to decrease their reliance on their legacy systems, increase their ability to drive innovation, get to market quicker reduces some of that cost of complying with some of the increasingly complex regulatory requirements. In the U.S., e-bank (inaudible) and USAA, all recently completed conversions for IPS. Wells Fargo is completing a conversion later this year for a commercial prepaid offering. IPS also part of the access prepaid, which is our prepaid program manager to support global travel programs, such as the Qantas multi-currency card, which I have talked about last quarter.
So, just to give you a headline on this, in the last couple of years, we have increased our IPS customer base from 5 to 16. We are now in 23 countries and 17 languages. We can scale and we will scale and we will expand the platform. So, now let me turn the call over to Martina for a detailed update on our financial results and operational metrics. Martina?
Thanks, Ajay, and good morning everyone. Let me begin on page three of our slide deck, where you can see this quarter the as reported as well as the FX adjusted growth rate by essentially the same.
As Ajay said, we are very pleased with our performance this quarter given the continued slow growth economic environment. Net revenue growth of 15% combines with operating expense growth of 5% supported our net income growth of 19%. And EPS growth of 23% also benefited from our share repurchase programs. Cash flow from operations was $742 million, and we ended the quarter with cash, cash equivalents, and other liquid investments of about $5.1 billion. During the quarter, we repurchased almost 1.1 million shares of Class A common stock at a cost of approximately $580 million. Through July 25, we repurchased almost 300,000 shares at a cost of $174 million, and we now have $1.1 billion remaining under the current Board authorization. You will continue to look to repurchase shares on an opportunistic basis.
So, let me turn to page four, and here you can see the operational metrics for the second quarter. Our worldwide gross dollar volume, or GDV, was up 13% on a local currency basis to just over $1 trillion. U.S. GDV grew 6% with credit volumes growing 3%. And U.S. commercial credit growth was in the low teens similar to last quarter. U.S. consumer credit growth was slightly positive also an improvement from last quarter. Our U.S. debit growth was 9% driven by higher growth across all of our consumer and commercial debit as well as prepaid programs. And outside of the U.S., volume growth was 17% on a local currency basis. This continues to be driven by APMEA with more than 20% growth and solid 14% and 17% growth in Europe and LAC respectively. First quarter volume grew 17% on a local currency basis including more than 20% in LAC and APMEA and growth in the high-teens in Europe.
So turning to page five, process transactions grew over 11% globally. In the U.S. Retail growth of 5% which was lower than last quarter as we anniversary our pin debit processing wins. As you know, we are managing pin debit transactions to optimize our revenue and our transaction level has remained about the same over the past several quarters. Outside the U.S. process transactions grew 20%. We saw increased growth in all regions but particular strength in Brazil, Russia, Australia, Netherlands and South Africa. Globally the number of cards grew 8% to 1.9 billion MasterCard and Maestro-branded cards.
Let me now turn to page six with some insights on our revenue. Within our net revenue growth of 15%, gross revenue grew 12% in-line with volume and transaction drivers as well as some pricing. Rebates and incentives only increased by 2%. As you know the rebates and incentive line can move around on a quarter-to-quarter basis depending on the timing of deals.
Specifically in the second quarter, we had two factors that contributed to this relatively low growth rate. First, some contracts were not yet signed by quarter close and second we had some lumpiness due to the performance of a few contracts. Overall these factors represented about 2.5 percentage points of our total 15% net revenue growth.
Similar to the prior quarter, growth in domestic assessment was again driven by strong growth outside of the U.S. which comes at a lower yield. And the gap between the growth in first quarter volume and revenue continued to be due a higher mix of intra-Europe activity excluding the impact of pricing.
So let's look at the components of total operating expenses which you see on page seven. The increase in G&A expense was primarily driven by the impacts of higher compensation costs as a result of the increase in the number of employees compared to the same last year, to the same time last year to support our growth initiatives.
The slight increase in advertising and marketing expense was mainly due to the impact of new and renewed sponsorships.
Turning to slide eight, let's discuss what we have seen for the third quarter through July 28.
Globally our cross-border volume grew about 15%, so that's just slightly below of what we saw in the second quarter. And this was primarily driven by slower growth outside the U.S. due to the timing of Ramadan.
In the U.S., our processed volume grew 9%, up from our second quarter growth due to improvements in both credit and debit. Process volume growth outside of the U.S. grew 16% that's about equal to what we saw in the second quarter. And in particular our European process volume growth was in the mid-teens very similar to what we saw in the second quarter.
Globally process transaction growth was 14% to up from the 11% that we saw in the second quarter driven by higher growth in the U.S. for both credit and debit. Looking forward let me start with our long term performance objectives which have not changed. We remain confident that our business can deliver an 11% to 14% net revenue CAGR and at least 20% EPS CAGR over the 2013 to 2015 period and these growth rates are on a constant currency basis and they exclude any new acquisitions. We also remain committed to our annual operating margin target of at least 50%. However, assuming that the economic environment remains similar to where it is today, we now expect that net revenue and EPS growth in the early part of this three year period will likely be at the low-end of our stated ranges for net revenue growth and EPS growth and that is slightly better than we previously anticipated.
Now, I would like to share with you a few specific thoughts about 2013. So, given our stronger than expected second quarter net revenue growth and what we see for rebates and incentives for the balance of the year, we now believe that second half net revenue growth will be similar to what we saw in the first half. We continued to anticipate total 2013 operating expenses to grow a bit below the 8% currency adjusted growth rate that we saw in 2012 as we continued to spend on the right things to support our growth initiatives while keeping an eye on more discretionary spending.
We also continue to foresee some operating margin expansion in 2013. The amount of any improvement as you know will depend on both top line growth and the investment opportunities that may surface during the year. And for your modeling purposes, we now think that you could see a full year tax rate of about 31%. With respect to FX, if rates remain the same as they are today, so that is the euro continues to trade at the 133 level and the Brazilian real at the 226 level for the rest of the year. The impact of the euro and the real will essentially offset each other for full year 2013.
So, now let me turn the call back to Barbara to begin the Q&A session. Barbara?
Thanks Martina. We are now ready to begin the Q&A period. In order to get to as many people as possible, we ask that you limit yourself to a single question and then queue back in for additional questions. Operator?
Earnings Call Part 2:
- Company Earnings
- Ajay Banga