環匯 (GPN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Global Payments' first quarter fiscal 2009 earnings conference call. At this time all participants are in a listen-only mode. Later we will open the lines for questions and answers. (Operator Instructions).

As a reminder, today's conference will be recorded. At this time I would like to turn the conference over to your host, Vice President of Investor Relations, Jane Elliott. Please go ahead, Ma'am.

Thank you. Good afternoon and welcome to Global Payments' fiscal 2009 first quarter conference call. Our call today is scheduled for one hour.

Joining me on the call are Paul Garcia, Chairman, President and CEO; Jim Kelly, Senior EVP and COO; and Joe Hyde, EVP and CFO.

Before we begin, I would like to remind you that some of the comments made by management during the conference call contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to vary, which are discussed in our public releases including our most recent 10-K.

We caution you not to put undue reliance on forward-looking statements. Forward-looking statements made during this call speak only as of the date of this call. In addition some of the comments made may refer to normalized results which are not in accordance with GAAP. Management believes that normalized results more clearly reflect comparative operating performance.

For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8-K dated October 2nd, 2008, which may be located under the Investor Relations area on our Web site at GlobalPaymentsInc.com.

Now I would like to introduce Paul Garcia. Paul?

Thanks Jane. Good afternoon, everyone.

We achieved strong financial results for our fiscal 2009 first quarter. For the quarter, our revenue grew 30% to $405.8 million and normalized diluted earnings per share grew 31% to $0.71. Our North American segment reported strong growth, primarily driven by successful pricing initiatives in Canada and a favorable foreign currency exchange benefit.

We were delighted with our International Merchant segment performance, which was primarily driven by the favorable impact of our joint venture with HSBC in the UK. Additionally we continue to achieve solid revenue growth from sales initiatives in our [Asian-Pacific] region.

Now let's look at the segment details. Our North American Merchant Services segment grew 16% in revenues for the first quarter. We continue to focus on finding small and midsize merchants in the United States through our ISO channel and our own direct sales efforts. We also continue to sign mid and small-sized ISOs that have the potential to drive future growth. And as such we signed five new ISOs this quarter.

Our domestic direct credit and debit card transactions grew 20% during the quarter, and we had total revenue growth of 12% in the United States.

In Canada, our revenue grew 29% for the first quarter, primarily due to favorable pricing trends and a positive impact from the Canadian currency exchange rate. Our International Merchants Services segment experienced revenue growth of 176% primarily driven, of course, by growth in Europe. Our European expansion was due to the recent acquisition of 51% of the HSBC UK merchant business as well as a favorable year-over-year check currency exchange rate.

As part of the UK acquisition, we received a seasoned management team with the leadership skills and the track record to support our future expansion plans.

In our Asia-Pacific region we grew revenue by 29% for the quarter as a result of continued momentum, gained through pricing strategies, our sales force initiatives, and new product introductions.

Turning to our Money Transfer segment, we achieved total revenue growth of 5%. In the United States, transactions declined 10% for the quarter. This decline was partially due to a 13% reduction in the 780 domestic branch locations at the end of August, compared to 898 locations last year.

Despite this reduction in branches, our domestic revenues declined only 1% in the quarter, due to favorable year-over-year pricing. And, very importantly, our total Money Transfer operating income grew 20%.

In Europe, our Money Transfer revenue grew 37% for the quarter and we ended August with 90 branches. This strong revenue growth was primarily due to transaction growth of 9%, favorable pricing compared to the prior year and a favorable year-over-year foreign currency impact from the euro.

Now moving on to recent announcements. Firstly, we expanded our Asia-Pacific joint venture with HSBC on September 4th, 2008, by adding the Philippines to the existing 10 countries and territories that were included in the JV. The JV paid HSBC $20 million in cash with Global Payments' 56% ownership obligation, equal to approximately $11 million of that $20 million.

In addition, the Philippines are now included in the existing 10-year marketing alliance whereby HSBC will refer new merchant customers from its extensive branch networks to the joint venture.

We also recently announced an agreement in the Russian Federation to acquire United Card Service, which we refer to as UCS. UCS is a leading direct merchant acquirer and an indirect payment processor, operating in the high-growth payment markets of Russia also enjoying an expanding economy.

Under the terms of the agreement we will play $120 million to acquire UCS which had calendar year 2007 revenue of $34.2 million. Additionally, UCS entered into a 10-year marketing alliance agreement with [Rosebank] which has historically provided agent bank referrals in Visa and MasterCard bankcard sponsorship.

As part of this acquisition we are receiving a dedicated and experience management team and we look forward to working with them upon the completion of this transaction. I believe this to be an important step in expanding our footprint internationally, and we will continue to look for additional opportunities using the same financial and operating discipline that has become a cornerstone in our acquisition strategy.

I'll now ask Joe to further discuss our financial results. Joe?

Thank you, Paul. Our press release includes a GAAP income statement and a schedule that reconciles GAAP to normalized results. Our normalized results exclude restructuring charges and certain non-recurring non-cash items. As Jane mentioned, please see today's earnings press release for more information.

Before I begin reviewing our results, I would like to describe several new disclosures included in our press release.

First, we provided a reconciliation of our diluted EPS guidance. We added this disclosure to assist in reconciling our first quarter results and our full year guidance on a constant currency basis, given the recent volatility in the foreign exchange markets. As evident, we expect our constant currency growth over the next three quarters on a combined basis to remain relatively consistent with first quarter levels.

The most significant expected change comes from foreign currency which added 5% of diluted EPS growth in the first quarter compared to an expected 5% reduction to our group for the rest of the fiscal year.

An additional new disclosure was to expand our segment reporting as a result of our UK acquisition and anticipated future international expansion. In the press release we provided historical financial results by segment for fiscal 2007 and fiscal 2008. We also provided the supporting detail behind our effective tax rate calculation for these same periods.

Lastly, on the balance sheet and cash-flow statement, we had included the full line item detail in the same expansive format used in our quarterly and annual SEC filings. In connection with this change, we have separately disclosed amortization of acquired intangibles and share-based compensation expense. We are very pleased to provide all of these new disclosures to increase the level of transparency to our financial performance.

Now on to our results. We were pleased with the [70]% growth in operating income that we achieved in our North American segment during the quarter. These results were largely driven by strong revenue growth in the United States and Canada and the related economies of scale benefits. Our expenses in North America were largely in line with our expectations. Our International Merchant Services operating income grew 297% during the quarter primarily due to the impact of our 51% UK acquisition.

To assist you in calculating organic revenue growth, we intend to separately disclose the revenue achieved from this acquisition during the first year after completion. As such, we achieved $43.3 million in UK revenue during the quarter, which was consistent with our internal expectations.

The impact to operating income of this acquisition has been greater than expected, primarily due to lower processing costs than planned.

Moving to Money Transfer, this segment's operating income posted strong growth of 20% for the quarter as Paul discussed. This growth is a result of improved pricing compared to the prior year and the closure of unprofitable branches. Our corporate expenses increased during the quarter from the prior year, primarily due to the expansion of our corporate areas to support our continued growth in addition to costs associated with completing our UK acquisition.

On a consolidated basis, our normalized operating income grew 38% compared to the prior year and our normalized operating margin increased 130 basis points to 22.9%. We expect strong operating income and operating margin growth for the full year as a net result of the trends that Paul and I discussed.

The net of our interest income and interest expense line items resulted in $1 million in income during the quarter, which is a reduction from the prior year primarily due to the impact of our UK acquisition and lower interest income rates domestically. Our minority interest during the quarter grew significantly, compared to the prior year primarily due to our 51% UK acquisition.

Adjusting for the impact of current exchange rate and an additional month of UK financial results on a pro forma basis, our minority interest would have been in the $10 million range. We expect this will be the approximate quarterly run rate going forward, subject to fluctuation in the earnings of our two joint ventures with HSBC and our joint venture with Comerica.

Our effective tax rate for the quarter was 32.9% as compared to 35.4% in last year's quarter. This decrease was primarily due to a favorable impact from the lower UK statutory income tax rate of 28% and certain tax planning initiatives.

We expect a similar effective tax rate going forward, subject to onetime items such as changes in tax reserves due to income tax statute expiration. Capital expenditures for the quarter were $7.7 million which primarily related to technology and merchant terminal spending. For fiscal '09 we continue to expect capital expenditures to modestly increase over the $45 million spent last year, primarily as a result of our UK acquisition and continued technology and merchant terminal spending.

Moving now to the balance sheet, our reported cash was $288 million at the end of August. Despite the current economic environment and the credit issues other companies have experienced, we believe that we are in a position of significant financial strength. We expect to easily meet the repayment obligations on our five-year term loan, using internally generated cash flow. And we have an untapped $350 million line of credit with a group of stable commercial banks.

We grew our net cash provided by operating activity by 78%, during the quarter, to $67.8 million. And we expect strong cash flow growth for the fiscal year.

Lastly we believe that our healthy balance sheet provides us with a competitive advantage in pursuing our acquisition strategy. Paul will now discuss our fiscal '09 guidance.

Thanks, Joe.

Based on current trends in our ongoing growth strategy, we are raising our fiscal 2009 annual revenue guidance to $1.640 billion to $1.680 billion or 29% to 32% growth over the $1.274 billion in fiscal 2008.

We are also raising fiscal 2009 annual diluted earnings per share guidance to $2.37 to $2.45, reflecting 20% to 24% growth over our fiscal 2008 normalized diluted earnings per share of $1.98. This guidance excludes future acquisitions for potential restructuring and other charges.

I continue to be very confident about the long-term prospects of Global Payments, especially in our International markets and in the continued strength of our North American Merchant channels.

Operator, we will now go to questions.

(Operator Instructions). Dan Perlin with Wachovia Securities.

I just had a quick question. It sounds like you are moving into some of the smaller ISO channels. And I'm wondering to what extent did those smaller ISOs rely in terms of selling some of their incremental equipment utilizing third party lessors?

Then the second part of that question is are you prepared if at all to step in, since you are financially much more viable than maybe some of their lenders? Thanks.

First part of the question, in terms of moving into that channel, we really pursued ISOs of all sizes from small, medium to large for liability, 50-50 and zero liability. I'm sure there's a shift there, I just -- we've historically signed small, more smaller ISOs than larger ones on a frequency basis.

I think in terms of the terminal buys I haven't heard anything recently to suggest that it's problematic to get credit to purchase and then lease or just outright lease. We haven't had ISOs at least in the US coming to us and asking. But I would suggest if they were, I think we would be amenable to it.

But the credit markets are changing rapidly these days, so I think we will stay tuned and continue to try and support that channel with as much support as we have historically.

And then second question is on the UK -- HSBC UK venture. You've owned it only for a short period of time, but I'm just wondering there's been a lot of incremental moving parts, I guess, because we've seen some pretty significant deterioration in a lot of economies overseas.

I'm just wondering to what extent are you trying to manage that? Are you seeing any changes in the market over there?

Then if you could maybe just comment about how you're rolling out I guess in terms of Asia-Pacific platform consolidation. And then I will move on. Thanks.

I'll take -- I will take the HSBC question and, Jim, I will ask you to deal with the AP conversion.

Okay.

In terms of the HSBC question, they were No. 3 in the market and they were kind of marking time. And although management had a number of. I think, really excellent ideas, they weren't in a position to implement a lot of innovation.

That is one of the reasons the bank felt this was such a good idea. They reached out to us and of course we happily did this. And there is a fair amount of low-hanging fruit is the answer to the question.

So although there are pressures in every economy around the world and we're in uncharted territories. So let's see where this goes, but right now we are seeing nice growth from that business. And as I said we are taking advantage of some of the low-hanging fruit, including adding some sales resources in places that could support them readily. So it's looking pretty good.

Jim, do you want to talk about AP?

Sure. We've completed our certifications for the G2 platform with both Visa and MasterCard at this point in time. That was a milestone that was good to pass through, pass that recently.

We are contemplating for the front end starting this month to put a few merchants into beta. And assuming that goes according to plan, we will start to roll through Macau potentially this -- partly this calendar year if not the start of next calendar year. And then Hong Kong will follow.

On the back end, we have five countries including the Philippines which we just recently announced the purchase of. Those are slated to begin conversions the -- maybe the late first quarter, early second quarter of next year. So I think both front ends, this will be a big event for uses to get you to up and live in production and then back end continues to do well.

We've already converted to countries in the region, Macao and Hong Kong. This will give us another [5] [7] in total with four to go.

Excellent. Thank you, guys, for some good news.

Tien-tsin Huang with JPMorgan.

It's actually Reggie filling in for Tien-tsin. I guess a question on the US economy. Can you give us some color on what you guys are seeing kind of intraquarter? I know it's not a same-store sales growth type story here, but just any color on kind of trends you are seeing volumewise intraquarter, please?

We have seen some softness domestically. Now the good news is softness for us with our strong ISO channels still means pretty significant growth. It's just not as robust.

Now fortunately we are in a lot of other places, but clearly we have seen some softness. Things are developing as we speak. Who knows where this economy goes?

But I would like to refresh your memory that this is a nice place to be, even in recessionary times. There's lots of data that suggests that credit cards always grow even in recessionary times. And then there's the whole concept of discretionary versus nondiscretionary spending and we have -- we are rich with nondiscretionary channels like education and healthcare and the like, so -- in government.

I think it is a cautious environment. We are watching carefully. But I think we are as well-positioned as one could be given the macrotrends.

Okay. And I guess talking about moving toward smaller ISOs or signing smaller ISOs. Does that I guess give you an opportunity as to maybe price a little more aggressively? I know you guys have seen some price here from renewals on your bigger ISOs.

I mean, are you getting maybe a little pricing lift as you kind of move downstream to small ISOs?

Yes. There's a huge amount of -- the answer is yes. There's a huge amount of discipline in it, Reggie. It's all volume-driven and the ISOs many of whom know each other extremely well.

So you have to be a very honest broker here. So smaller ISOs have higher pricing and larger ISOs have lower pricing. And they are offered opportunities to -- through tiers, etc., to get various levels, but yes, smaller ISOs that is one of the advantages as you do price them somewhat higher than the really big guys.

But you got to keep in mind, you've got to make them competitive so it's not huge differences.

Certainly and then if I get one more question in. I saw yesterday the Bank of New Mexico had pretty weak numbers for August for Mexico money transfers.

Just curious. Have you guys noticed anything incremental maybe between July or August? Is that something that you guys saw as well? Any color there? And then maybe also, if you could talk a little bit about the demand environment overseas with Europe?

You definitely posted great revenue growth, but just incrementally, are we seeing a slowdown in demand in both Mexico and in Europe? If you could talk to that please?

Domestically (inaudible). As the numbers suggested, July was a slower month. August, we saw some rebound relative to July. As Joe reported, [as] the numbers, as did Paul, the quarter was still a very good quarter for us in this business as it was in the fourth quarter of last year.

So while we, like the rest of the competitors in this marketplace. are working through a much slower market than we did a couple of years ago. I think from a performance standpoint I think we are still doing very well. In terms of Europe, that market similar to the US has clearly seen a slowdown.

Most of this business is tied to construction, agriculture construction being the largest piece and their dependence on construction and construction growth has slowed such as we have seen in the US. Now the -- we would refresh your memory that we also acquired a business last quarter in Europe. And so part of the growth you are seeing there is aided by the addition of another 15 or 17 branches.

I will just add one thing that it's also very geographic. Arizona is not doing great. Texas -- no one told the people in Texas that there is a potential recession. Their economy is doing wonderfully. There's a ton of jobs for those who would use our services. And with the terrible stores that swept through there, even more so.

So I think there is kind of a nice tailwind at least in that region for us. And we are very heavily concentrated in Texas.

[Pat Berchin] with Citi.

Actually one balance sheet question first and that was the increase in accounts receivable. Could you take us through that, please?

Yes. That is the effect of two months of the UK revenue which we did not collect until September.

So nothing ex that of [MDSOs] back to normal?

Yes. Next quarter that should come down. I think it was up $40 million from May. Everything else being equal it will be up one month of UK revenue or $20 million.

So we should get a positive inflow in the second quarter.

Okay? And then just to follow-up on the prior question, in terms of June, July and August, sequentially you didn't see any, let's say, material sharp falloff in volume numbers in the U.S., particularly in the month of August or -- sure you don't want to comment about September. But whatever you are seeing would be helpful on a real-time basis.

Sure. Are we -- we're discussing [Dolex] or merchant or --?

Merchant. Sorry. Merchant, please.

Okay. We definitely saw some softness domestically in the first quarter for our merchant business both within the ISOs and within the direct business. Direct portfolio, which is a piece of that business and the ISO is the other piece. Both did see it.

What I was saying was that this business has a couple of good things going for it. The nondiscretionary exposure as well as just the ISOs manage to get it done in pretty much any environment. So we still posted some pretty darned good growth. But we clearly saw softness absolutely.

Okay but in raising your guidance you've taken all of that into account etc.?

Thank you, yes. Clearly we look into that and we absolutely took that into consideration and I hope everyone appreciated too, we took great pains to break out some FX numbers for you too that really give you a feel.

Right and to highlight you are actually forecasting a headwind correct, the next three quarters? Negative $0.04, I think?

We are domestically, yes. I mean we are going to -- go ahead, Joe.

Yes we are forecasting a headwind on FX over that -- over the next several quarters.

(multiple speakers) well to with our domestic business, to your point.

That's very helpful thank you and congratulations.

Thank you very much.

Robert Napoli with Piper Jaffray.

Good afternoon. Congratulations.

A question on revenue guidance and effect, I guess, on currency from currency if you could? If you look at the full year revenue guidance in the first quarter, revenue, if you analyze the first quarter revenue, the full year, it's not that much below the full year guidance.

What type of revenue effect are you modeling for in your low-end, high-end guidance figure? Could you talk about that? Because the revenue guidance seems a bit conservative.

The revenue impact is less on a percentage basis than the earnings. So in the quarter, we had 5% positive EPS benefit, but on the revenue it was only a 2% benefit.

We will likely have some amount of drag in the next [few] quarters on revenue, but I would not expect it to being more than a percent or to at the most as compared to the earnings per share which is expected to be another 5% impact.

Then is the revenue guidance essentially taking into -- I mean, the level taking into account the unknowns with regards to the rapidly changing global economic environment, I guess is maybe the way to put it?

Yes. We have done our best to incorporate that between the low end of the guidance and the high end of the guidance. It is very difficult to try to forecast, but we do believe that we have incorporated the potential for economic -- the current (inaudible) and where we might go from here.

On the deal side, the -- you guys are in great shape with the balance sheet. And are the steel prices must be coming down or maybe people will pull them from the market, but there can't be that many bidders for some of these deals compared to what you had in the past especially with First Data so leveraged.

Are you seeing a decent flow of additional deals? Do you have as much as you want to handle at this point? You have made some pretty attractive acquisitions. Are you -- do you consider your hands full at this point in time? You still seem to have enough dry powder to take advantage of your strong balance sheet.

Yes. We feel we always -- we would like more acquisitions. We have a fairly deep pipeline, in terms of the competitive nature of them. It hasn't dropped off as much as one would think. There is a lag factor and there is always of course - unless someone truly is terribly motivated to get a deal done, they can always pull it. So there is always that moderating impact as well.

But the biggest influence is what you mentioned initially. That's First Data who is aggressively beating these things. It's kind of not in there as actively. That has helped a great deal.

So yes we look to get some more deals done. We would like to see more and more deals and we are working diligently to make that happen.

Last question on Russia. Very interesting acquisition with tremendous long-term potential, but are you seeing significant changes in the spending in that market with both political and the oil markets, the effect of those items?

Yes, I think on -- they are on a macrolevel, I think on the consumer per se not as dramatic. That business is growing pretty well. Rosebank is a good partner. There's a lot of issues with financial institutions in those markets too, but remember Rosebank was bought by -- the majority of it was bought by [Societe Generale].

So it had some great footings and we are very bullish on Russia. Now it is a complicated market, as you pointed out. And there are dynamics that are developing every single day. They are around the world. And Russia has a couple of extra ones thrown in with their political situation, but it is well worth the gamble.

We are delighted to be there. We think we are better positioned than anybody.

I would also add that we have been working with this opportunity for quite some time and we've gotten to know the company quite well and while we haven't closed, we have been able to monitor its performance and they continue to at least up until recently, they've been doing quite well. And I don't see how that is going to change in the near future.

Greg Smith with Merrill Lynch.

I don't think this has quite come up, but the bump up in guidance is pretty sizable. Just can you walk through what has really changed in the two months since you last gave the guidance? I guess we had the Philippines in there, but we don't have Russia in there.

So I'm still sort of trying to figure out what's kind of really changed over the past two months?

Sure. There are two major areas that are impacting the increase in guidance which we are very pleased to be able to do this quarter.

The first is in Canada. The pricing trend that we talked about that has been very favorable to us has continued so and it's even been better than what we expected. As we discussed on the last call, we had forecasted that that benefit would tail off during the course of the year and that has not occurred so far into this quarter. And we are just more bullish on the likelihood of that benefit continuing.

There's also been over the past couple of months, a push towards a migration of consumers to premium credit cards in Canada. And under the new pricing structure, that has provided a significant benefit for us that we did not expect or plan for.

The second area is the UK acquisition has been a higher benefit than we expected. As I mentioned in my earlier comments, the revenue was largely within our expectation. But the expenses have been lower than planned. As we talked about on the last call, we signed the deal in late June. Closed it a week later. We were on a call with you all a few weeks after that.

Had not owned the business for even a month at that time. Had not seen any actual monthly data on our books at the time of that call and so it was a very new deal for us. And to complicate that this is a business that did not have a P&L historically. It was really a product line within the bank and they were not attempting to measure the profitability of it the way that we are doing now.

So most of the expenses were commingled with other expenses within the bank and the 8-K that we filed which had the financial statements in it were larger than results of allocations within the bank. That allocation methodology was still being discussed and still moving around somewhat at the time of our call.

And we did not place a high level of reliance on it, because it's largely allocated. And we did not expect the allocation methodology to necessarily be the same in the future.

So having two months of actual -- I'm sorry. Having two months of actual data now is not a lot of data, but it's a lot better than having zero monthly data.

So the expenses came in lower than we thought and we have flowed that through for the rest of year which is a very positive story.

Cool and I expect there's no clawback provisions on their part when they see your numbers. Right?

You remember they get 49% of the results so they are very happy and quite frankly, we --. No, these guys are very happy.

Yes, okay, no. Then just on your line of credit, we've been hearing about other companies tapping their line of credits just in case? And it sounds like you guys didn't do that at all intraquarter. I mean were you at, have you been to the point that, given the credit environment, you want to tap that just in case?

No. We were aware that other companies were doing that and we've had a lot of discussion with our bank group. We have a wonderful group of bank, very successful, JPMorgan, Wells Fargo, Bank of America.

And they made it very clear to us that the facility is there if you need it. But we did not feel it necessary to pull that down especially given some of the concerns with the money market funds that are out there. So all of our cash today is in very safe money market funds that are -- most of which are under the new U.S. Treasury Money Market Insurance Program. We feel good about that and we had no other need to draw down on that line.

We are cash flow positive every month that we are in business. So it just did not make sense to take it to that point of extreme and put additional expense on the Company through borrowing costs for that purpose.

Okay and then just last question on Russia. Are there clear synergies with your existing Eastern European operations? And what is the competitive landscape like, in Russia?

I will take that. There are some synergies and the good news is, is that we have a staff in Russia now that works for the group in Prague and they are familiar with each other. So we are looking for some synergies as we speak.

In terms of the competitive environment, there are a number of other players. But UCS, we think, is in better position than any of them. And quite frankly I think they've been in business longer than just about any of them.

[Julio Contarez] with Goldman Sachs.

Great, guys. Real quickly, just to make sure I understand the currency mixes. As we are looking at the UK euro and I guess Canadian as well, what would be the proportional contribution from each one of those currencies as you think about the revenue expectations going forward and the drags that you're sort of factoring in now?

The Canada revenue is shown separately and the UK revenue I gave as being $43 million in the quarter and that's two months of data. So it's roughly $20 million per quarter. Sorry, per month. So I think you have a good sense for that.

I think the additional color I can provide is that in Canada we have a much higher contribution margin, if you will, in that business because we've synergized with the rest of the United States in that area. And it just has a very high margin from that perspective.

And as a result we are probably more exposed on the earnings side to Canada than we are in any of the other currencies. For example, in our UK deal, the margin is much lower than we have in Canada, but we also pay 49% of that out as minority interest which provides even greater natural hedge for us.

So changes in currency can impact our revenue. On the earnings side, it's mainly Canada.

Okay. I didn't hear you say anything about the euro, so I'm guessing that's all UK British pound?

The euro is -- again, the only place where we were exposed to the euro was in our Europe Money Transfer business, which is just very small. And the margin in that business is also smaller than we have in our other businesses. So there's really a minimal impact.

The Czech krone is kind of moving along generally with the euro and they are part of the EU, of course. And they are going to convert to presumably the euro eventually. So just for that caveat.

That's [just one]. We have had a very large lift in the Czech currency exchange rate that the exchange rate has been up 35% over the prior year quarter, but we don't expect that to continue over the next several quarters. But that's another element.

Switching over to the contribution from -- well, looking at the International Merchant Services margins now, the contribution from the UK obviously played a big part of that.

Just kind of doing some back of the outlook calculations here, if you look at the quarterly sort of margin contribution to what you had last quarter versus what you have now for the International Merchant Services segment, it almost seems like that operating margin for that UK business is in excess of 30%. Probably north of 35%. Is that a sustainable rate?

Can you also talk a little bit about having those lower expense benefits? Is that something that's a onetime situation or would you have to build out some other type of items that would eventually bring down some of that margin contribution that you saw from the UK this quarter?

The actual -- while we don't intend to give a lot of detail on earnings within the International segment, we tend to talk about it as a whole. Since the UK deal is new to us, I'm happy to give you some color as to where the exact margin was.

It's actually in the high 20% range in the quarter. And going forward, we are expecting that to continue. Of course, we've only had two months and we will know more after we have had the business for a longer period of time. We are going to make some investments in that business as well, but we do expect to -- we have included in our guidance kind of that high 20% range for the rest of the year.

Lastly, on that UK business, how much of that work is of the work that you guys are doing there is online channel versus actual physical merchants?

The vast majority is still brick and mortar merchants. They do have already -- sell international acquiring solutions, but it is relatively new. And on a comparative basis it's small compared to the brick and mortar.

I would also add to Joe's comment about margin in that business. As we integrate the UK, just like with CIBC, the National Bank, and the other in Asia that we are currently going through, we would expect that to help the margin, the already strong margin in the UK, that will help but in the out years.

Andrew Jeffrey with SunTrust.

Just to expand a little bit on the ISO discussion. It sounds like you are getting sort of broadly more diverse in your ISO channel. Were there any significant changes worth calling out, for example, any of the top four or five ISOs that I know have historically sort of had a disproportionate effect going away? Or were there any other changes other than sort of the natural progression of the business over time?

No. There haven't been any changes relative to the high end or the middle or lower side of the equation. As I said earlier, our strategy has been to service the channel. And we are really willing to support anybody at introductory levels, 0% liability program to a shared liability to a full liability.

You are correct. We have a number of very large successful organizations that have been with us for many years. And those relationships I think are in good shape. And we continue -- we expect those to continue.

Can you remind us win some of those larger contracts come up for renewal?

I think we've said historically there are none planned in the next 12 to 24 months. There's nothing imminent and typically that honor renewal. They tend to stay with us because the cost of moving is complicated. It is not to say that we won't lose ISOs, but our track record thus far has been very good in that regard.

In Asia, growth continues apace. I know the first quarter can be sort of a seasonally light quarter.

Can you call out the operating margin or income contribution from Asia? I know you cycled through a pretty meaningful investment there. Are you starting to get some natural economies of scale or is it still too small to have hit that inflection point on margin?

We are in fact in the markets that we are giving some significant volume from, where we have a commanding position and it would be Hong Kong and particularly because that drives still a lot of volume. The more -- the rest of the countries are more developmental.

Some, China and India, are extremely developmental now. And it is going to be a while, but, Andrew, we did promise some margin growth and that's our intent to deliver that in that business. And over time this business absolutely positively will be more more than accretive.

Okay. Thanks. Appreciate it.

Adam Frisch with UBS.

Thanks. Good afternoon. Question on merchant margins. They were better across the board, but I wanted to delve into North America for a minute.

Specifically, if pricing in FX and Canada were cited as areas of strength, does that imply that the US was down year-over-year on a margin basis? But this is the type of margin trend we should see from this segment, kind of flattish to up a little bit? Going forward?

Adam, let me hear the question one more time.

The margins were, across the board, better in merchant for both North America and international -- can you hear me okay on this?

Yes. I got it. I'm sorry.

So we have improving margins in North America and you want to parse it by what?

US.

Okay.

So if it was -- if FX and pricing were cited as strength in Canada, does that imply the US was down? (multiple speakers) Then what do you expect from this segment, this particular geography going forward?

That's a fair question. As we said earlier we definitely saw some softening in the domestic business in the US. Because this is such a scale business, when you see some of that it it doesn't delever. So although we feel we still have growth particularly from the ISO channel it wasn't as robust as in earlier periods.

So we did see some softening. That did translate into margin. So it's exactly right.

Do you expect it to be kind of flattish through the fiscal year? (multiple speakers)

Yes, we are in fact. We've taken that into consideration and even deteriorated it a little bit more for our forecast. And yes. And the answer is yes.

Okay. So again then the plan goes back to what you have been saying for, I guess, the last 12 plus months is that US should be stable and the margin expansion should come from Europe and Asia?

Well, long-term clearly (multiple speakers)

Should that be the formula in fiscal '09?

Yes, that -- well we did see, we actually are ahead of what I led you guys to believe. But we are feeling very good about where we are and we did talk about margin expansion for the year overall with all those components and the last two you mentioned are clearly part of that driver.

Okay. If you could touch on the contractual aspects of your ISO relationships - what if any impact or slower consumer-spending trends having on revenues and margins? Is there any kind of hedge built into them based on volumes like we see with the networks?

No. You are suggesting if their transaction counts dropped that would change the margin?

Right, because they get on lower volume bands or something like that.

There's -- I guess that possibility exists, but as Paul said almost to an ISO they all continue to do quite well. And I don't think any of them that I am aware of that are in jeopardy of sudden material change one way or another.

Okay and in terms of the ISOs are they less willing to switch vendors right now, because they don't want to disturb their client base in this kind of environment?

I think the answer to that is yes. And I don't think that is necessarily an economic environment situation. It is very disruptive.

We have very aggressive entrepreneurs that run these ISOs and they are constantly pushing us, leveraging us, putting us against others and in some cases making demands - some of which we will meet, some of which we will not meet. That could at some point result in an ISO leaving us.

But what we're saying is, at the end of the day, the numbers we provide to you take into consideration just about any contingency that we could see. So I can't predict exactly what will happen. I think it is unlikely that if an ISO slipped a notch because of the economy that we would penalize them, however. That would be unlikely.

I would just add as well to that the market is still very competitive for pricing. And so some of our competitors are not as active in acquisitions as they have historically in the area of signing up ISOs or domestic business. Those continue to be aggressively priced and I think that is always attractive for organizations.

So we have to balance all the needs of our customers as well as our needs of our shareholders when we reach agreements with these guys.

Great. Thanks. Nice quarter.

Kartik Mehta with FTN Midwest.

Good afternoon. I wanted to find out if you think that there's been any change in from bank philosophy because of the recent turmoil we are saying? Either domestically or internationally for their merchant business?

The answer is yes. I mean these guys do have in some cases very valuable assets and I think that this is an opportunity to monetize.

In other scenarios, in some of the unfortunate scenarios like Wachovia, they have referral agreements with our competitors. And I'm not exactly sure how that is going to shape out.

The same with WaMu. They had a referral agreements that one of our competitors paid handsomely to receive. And I think that just goes away.

These are interesting times right now. And I think that there are opportunities that will present themselves if you are -- if you have enough dry powder and willpower. And that is what we're hoping for.

Are there any other parts of the world where Visa or MasterCard might be making changes to either (inaudible) or assessment that could benefit you going forward?

Yes. The answer is every place we are. Literally. Not to be -- not trying to be sarcastic truly. They are in fact looking at all the markets and you saw in Canada what could happen.

There was an interesting ruling from Australia that the government is stepping back from the basically control of that environment ad although they are still making demands on the associations. But yes I think Visa and MasterCard are looking at lots of changes in every market where he and. That is generally a good thing, particularly when the Interchange goes down.

And just last question, Paul, on your Asia Pacific. I think you had said you added some salespeople there. You're introducing new product. Could you quantify it, maybe, the number of salespeople you're adding, maybe much -- how many you had and what you went to? And maybe talk about some of the new products you've added that help that joint venture?

Yes. We are about 275 salespeople in Asia roughly. And that's up but not dramatically. We, in terms of products, we've done a number of things. Having a currency product has been a big demand -- pardon me.

(inaudible)

Yes. Well, go ahead, Jim.

I would say there are probably three, DCC being one, the group there. Shortly after we closed on the deal, opened this up in a couple of key markets for us and I think that's been a good opportunity for certain vertical markets.

Delayed payments for a large payment to say a store that sells television sets that would be -- enable the customer to pay over a period of time. That program we do together with HSBC enables us to premium price the offering.

Then in terms of terminals, the bank pretty much restrained during the year. We were between signing and closing restrained the amount of new terminals being released in the marketplace. And we have rectified that situation with larger terminal piece as Joe said in his comments and part of those [bodies] have been into that market.

I guess I lied. I had one more question. Have you seen an increase in customer attrition? I know you said there was some softness from a transaction standpoint. Has that resulted in a greater number of businesses just going under?

No, we haven't seen it on an attrition faces. I think where we are seeing it, I think, are ISOs as well. Average tickets have come down so that has an impact on our contribution because a big part of what we bill is a spread basis, opposed to a per transaction. And then just over all softness in sales more than on an attrition basis.

[Charlie Murphy] with Morgan Stanley.

Thanks for the increased disclosure. I was wondering if I could get transaction growth in Canada, Asia and Europe?

Sure. In Canada it was kind of mid -- single digits. Kind of mid to mid single digit in transaction growth.

In Asia we've not historically provided that data. It's probably tracking just underneath the revenue because we have had some repricing benefits there. And then in Europe again we did not provide it because of the impact of the UK deal. We will have to think about how we've approached transactions in Europe going forward.

But transactions have been running in kind of the teen level. Right. And pretty consistent.

They are pretty consistent with revenue growth in both of those markets. The exception was Canada.

Great and could you give us any sense for how quickly UCS can grow on the topline organically and how accretive credit you expect it to be in the first year when it closes?

Yes. In terms of their topline growth, they've grown pretty nicely since we announced this transaction. So this is a good solid grower. Probably in the 15% to 20% range. In terms of -- and we think that is sustainable.

In terms of accretion, I would think of a small amount of accretion on this thing. I mean this is all about a footprint in an exciting market and not unlike China. We are going to eventually look for accretive margins, but initially you are in an investment mode. We will be expanding. There's lots of things there their president wants to do. He is a terrifically talented executive and that is going to take some investment on our part.

But I think that's just a great story.

[David Koning] with R.W. Baird, after which Mr. Garcia will give his closing statement.

Just a couple questions. First of all we've heard some ISOs say that voluntary attrition has actually been reduced in this economy. And they are taking advantage of that by raising prices several basis points.

Now you probably don't get a benefit from ISOs raising prices, but on your direct business are you taking any advantage of that type of trend?

We have not done anything out of the ordinary in the last quarter nor do we anticipate in the future. We do see exactly what the ISOs do. I think they are pretty aggressive. More so than we are, quite frankly, because our direct portfolio is very different.

And you're right we don't get benefit from that because we get transaction fees for those guys. Jim, do you want to add any color to that?

It's not something I've heard recently that there were pricing initiatives around the economy. I think you typically see it in the spring and fall for matching up with Visa MasterCard, now Discover releases. But I don't know of anything out of the ordinary and the changes that are going into effect October are not that significant.

Great. And just one thing on the cash-flow statement. There was a $5.7 million I think inflow from the sale of contractual rights. What was that item?

There are two items in there. About half of that relates to the divestiture of a portion of our interest in a Russian credit card or credit information company.

The other half relates to our Discover program. If you remember we purchased the merchant portfolio of Discover and in connection with that we had as a benefit to our ISOs we have been selling the contractual right to future commissions on Discover transactions to our ISOs so that our ISOs could sell Discover services. And the proceeds from some of the sales have started to come through and that's about half of that impact.

Okay. Well, thank you. And thank you to all of you for joining us on today's call. We appreciate your support of Global Payments and we sincerely hope to see you at our Investor Conference at the NYSE on October 15. Thanks so much.

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