環匯 (GPN) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Global Payments fourth 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). And 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.

Good afternoon and welcome to Global Payments fiscal 2009 fourth quarter and year end conference call. Our call today is scheduled for one hour. Joining me on the call are Paul Garcia, Chairman and CEO, Jim Kelly, President and COO and David Mangum, EVP and CFO.

Before we begin, I'd 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 on this call 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 today, July 23, 2009 which may be located under the Investor Relations area on our website at www.GlobalPaymentsInc..com.

Now I'd like to introduce Paul Garcia. Paul.

Thank you, Jane and thanks everyone for joining us this afternoon. For our fiscal 2009 full year, we posted strong financial performance with revenue growth of 26% to $1.602 billion and normalized diluted earnings per share growth of 13% to $2.23. On a constant currency basis, our full year revenue in EPS growth are 32% and 24% respectively. For our Q4, we achieved revenue of $402 million which represents 17% growth. And EPS results of $0.46 representing a modest decline over last year. We are pleased with our recent acquisitions of United Card Service or UCS in the Russian Federation and the remaining 49% ownership interest in the United Kingdom joint venture with HSBC.

Our overall growth strategy remains the same, to grow market share in each of our existing geographies, so expand our global footprint via acquisitions and to drive and prove economies to scale with investments in systems and back office integration. The adoption of card-based payments around the world continues to fuel both our industry's overall growth and our organic growth. We believe that our mix of business and mature markets that yield higher margins and early stage long-term growth markets, such as China and Russia, provide a solid platform for long-term growth. We plan to continue to augment our businesses with targeted investments and acquisitions focusing on Europe, Asia Pacific and North America. We will, however, continue to be disciplined in our approach and we will focus on core merchant services businesses or portfolios with solid market share and potential to deliver long-term return to our shareholders.

We also continue to make progress consolidating our technology platforms around the world. We continue to see tangible benefits from these consolidations beginning in our fiscal 2011. Our merchant transaction growth rates for the quarter across all of our geographies were generally about as we expected. With US transaction growth of 16%, primarily generated by our ISO channel, solid single-digit transaction growth in the UK and low single-digit growth in Canada.

Our market presence, our distribution channels and our ability to deliver high-quality service and products to our customers and partners all play an important role in delivering strong financial results. Finally, and as we discussed in last quarter's conference call, the money transfer business continues to face challenging macro economic and immigrant labor trends. Despite these difficulties, I'm pleased to report that we maintain double-digit operating margins in that business. Our goal is top continue to drive solid margin performance in this business in fiscal 2010, but this may be difficult given the ongoing market conditions. Now, here's David Mangum to discuss the financial details. David.

Thanks, Paul. I plan to cover the financial impact of the recent acquisitions, segment results, margins around some balance sheet and cash flow highlights. In the fourth quarter, USC performed about as we expected overall and posted revenue a little above our $2.5 million expectation.

For fiscal 2010, we continue to expect UCS to be neutral to 2010 normalized earnings per share. Our acquisition of the remaining 49% of our UK business on June 12, 2009 will have no impact on revenue, operating income or operating margin as the business was already fully consolidated based on our majority ownership and control. However, since we now own 100%, we will no longer record any minority interest expense related to this business. In addition, due to the transition provisions of FAS-141R, Business Combinations and FAS-160, Noncontrolling Interests in Consolidated Financial Statements, which we adopted as of June 1, 2009, we treated the acquisition of the remaining 49% as an equity transaction. That means we did not apply purchase accounting to this transaction.

As a result, we will not increase the intangible assets for the UK and will not record any incremental amortization expense for the business. We did, however, take on additional debt resulting in interest expense for this acquisition. We expect the 49% acquisition to add approximately $0.09 to $0.12 of earnings per share in fiscal 2010. At the risk of stating the obvious, this is not a one-time gain, but rather reflects ongoing accretion from the business.

The US dollar weakened a bit against our key currencies in late May and early June and then strengthened in July. Our full year fiscal 2010 revenue and earnings per share outlook assumes that the US dollar will likely weaken just a bit from current levels over the course of fiscal 2010. This weakening could result in about 1 percentage point of earnings growth in fiscal 2010, which is already factored into our EPS expectation range for the full year. We likely will see quarterly fluctuations in growth, primarily in Q1 and Q2 as we annualize the major currency movements from last fall and we will discuss those with you when we report our results for those quarters. Any fluctuations in currency rates, of course, may cause variances to our outlook.

Our North America segment reported revenue growth of 3% for the quarter, driven by our US ISO channel and some modest pricing initiatives offset by the unfavorable impact of the weakened Canadian dollar. As we look ahead, please remember that the majority of last year's Canadian pricing initiatives annualized in April and as a result, we expect revenue growth in Canada to return to traditional mid-single digit levels for fiscal 2010. We saw solid performance from our international merchant segment this quarter. Growth there was primarily driven by our original 51% joint venture acquisition in the UK, which added $55 million of revenue in the quarter. Asia Pacific continues to deliver strong results and we anticipate fiscal 2010 revenue growth in the mid-teens from that region.

Operating margins for the fourth quarter and the full year were about what we expected at 16.5% and 19.3% respectively. Consistent with our overall strategy, we expect the combination of flat to modestly declining margin performance in North America and money transfer and expanding margins in international to drive the opportunity for modestly expanding operating margins for the total company for the full fiscal year of 2010. As we position ourselves to execute our strategy and drive further margin expansion in subsequent years. We expect our net interest and other expense line to significantly increase in fiscal 2010 due to the additional interest expense for the new term loan. We expect LIBOR to increase and be about double current levels by the end of the fiscal year. We expect our normalized effective tax rate for the full year in fiscal 2010 to be similar to the 33.2% rate we recorded for the full year of fiscal 2009.

Turning now to balance sheet and cash flow. At the end of the quarter, our available cash totaled about $100 million. As we recently reported, we completed a new $300 million unsecured three-year term loan which has a $230 million US tranch and a $70 million equivalent British pounds sterling tranch to better leverage cash flow generated by our UK operations. We used the proceeds to pay off our revolver, thus providing us an additional untapped $350 million line of credit and significant remaining debt capacity.

During the quarter, we spent $15 million on capital expenditures and spent $41 million on capital expenditures for the full year 2009. For 2010, we anticipate full year capital expenditures to total about $45 million with approximately half of that from merchant terminals. Canada represents the largest portion of the terminal spending due to industry requirements to replace existing point of sale devices with chip compliant devices.

And on a final note, for those of you interested in calculating cash earnings, we want to provide you with the data to assist you in doing so should you choose. Many of you currently use the amortization of acquired intangibles from our cash flow statement in calculating cash earnings. But that misses the impact of minority interest accounting. Therefore, to adjust income before taxes in your models for the impact of amortization, you add back about $20 million of amortization expense to fiscal 2009 and about $29 million to fiscal 2010. To keep this simple for now, I would suggest just keeping your tax rate the same. Please note, though, that amortization will fluctuate over the course of the year due to currency translation.

And now I'll turn the call back over to Paul. Paul.

Thanks, David. Based on our current outlook, we are providing 2010 annual revenue guidance of $1.690 billion to $1.740 billion or 6 to 9% growth over fiscal 2009. We are also providing fiscal '10 normalized diluted EPS guidance to $2.43 to $2.54 reflecting 9% to 14% growth over fiscal 2009. We are pleased to provide this guidance and at the prospect of expanding margins. We expect margin leverage to be driven primarily by our international segment with margin expansion in the UK and improved operating leverage in Asia Pacific. Operator, we will now go to questions.

Thank you. (Operator Instructions). We'll go first to James Friedman with Susquehanna.

Hi and thanks for taking my questions. I was wondering first, in terms of the Canada contribution, I think you mentioned on the call that the pricing benefit that you received in the past annualized in April, are you seeing any potential for new price increases and there's a lot of discussion there related to Interact. I was wondering if you could give us an update as to the pricing environment in Canada?

So just in terms of relating to the financials, James, this is David, there are a couple of price increases sort of at the margin assumed in 2010, nothing remotely resembling the scale of what you saw in 2009, just more of the typical management of the market and management of the operation, which we do a pretty nice job of in Canada. I think in terms of the ongoing changes Interact or anything we see on the horizon, I'll turn it over to Paul and Jim.

I'll be happy to comment on the Interact. It is the one debit brand in Canada and April and MasterCard -- Visa and MasterCard recognize that Canadian consumers would benefit from a brand that has more global acceptance. And consequently, they are in the throws of entering that market and that would, in fact, have some opportunity for processors and you're exactly right. We're not in a position to quantify it at present, but we do think there's some upside opportunity if that, in fact, is successful.

In terms of the timing, the fourth quarter was the Visa annualization and MasterCard will be during this first or second quarter of 2010 when that annualizes. There probably -- as Paul alluded to as the debit networks gain traction, cards are issued, we will see an interchange where interact today does not have an interchange. You'll see an interchange in the market and the likelihood is that will provide us some opportunity as well.

David, I know you had alluded to the revenue impact related to the Canadian dollar. How should we think about the margin impact vis-a-vis Canada?

Relative to --

To the fiscal --

-- the order of the year of --

Fiscal Q4.

So fiscal Q4 really sees one more of the full quarter effect on the year-over-year basis of the movement in the dollar we saw starting Q2. So, at the end of the day you've got a business that would have grown, in the 20s in local currency reduced down to some of the numbers you see in our release by basically FX and nothing else. Does that help enough?

Yes. I mean I guess that that is revealing with regards to the revenue you're describing, but how about the margin? My understanding was that you had fewer costs there than you might have revenue.

Sure. So to step back for a moment, I apologize. We don't quote the margin by country as you know, but Canada operates essentially for translation purposes on a contribution margin, having a great deal of its expenses for operations and back office support in the United States and our Baltimore operation center as well as some of the US headquarters. So while I can't quote you a number, it operates at what I'd call a contribution margin looking more like a gross margin than anything else and I think if you shape it that way in your model, you'll get a sense for how that rolls to the earnings line for the full year and what that really means for schedule nine in the back of the earnings release.

And then the last thing, occasionally you'll at least share some qualitative observations about debit versus credit, Paul. I was wondering if you could share your observations about those two payment card methodologies?

Sure. There's -- you've seen a lot and as reported by those that report these numbers that debit is growing a little bit faster than credit, in fact, significantly faster than credit and I think what we perhaps haven't made clear in the past is not only do we process a significant amount of debit in the United Kingdom and in Canada and in emerging markets, we have over 50% of our transactions are either signature or pin based debit in the United States. So as that does -- that debit usage does expand, we do benefit from that and we are seeing a pickup in debit more quickly than credit.

Appreciate the call. Thank you.

My pleasure.

We'll go next to Tom McCrohan with Janney Montgomery Scott.

Hi, good evening.

Hi, Tom.

Can you just give us a revenue contribution expectation from the HSBC joint venture now completely owned and USC? Should we just be going with the 55 million run rate and the 2.5 million quarterly run rate for both companies or is there anything else that's coming on line that is not in those numbers?

Right. So I guess in reverse order for the Russian acquisition for UCS, you should use the 2.5 as your are jumping off pont and analyze with that. For the United Kingdom, rather than talking about the 55 and jumping off point, what I'd point you to is a business that now we've got it fully in 2009 and obviously it will be in 2010 heading back toward above market growth for the UK market, but that means probably mid-single digit revenue growth above what's a low single-digit sort of transaction volume growing market on an organic basis.

Thanks. And then, David, in regards to the new terminal facility, I couldn't figure out from reading the credit agreement what the actual interest rate is in those loans. Is that LIBOR plus a spread and if so, what's the spread at current pricing tiers for that term loan?

Yes, sure. You're missing fees and things like that as well, Tom. So if you look at the first tier leverage, it will say something like LIBOR plus 300 or north of that. We're kind of in at that range right now. Along with the fees on top of it, you would add a little to it. That's the general way to get to the percentage. I'm pretty sure you can get at it from that color.

And the negative covenant that's most binding and most restrictive total debt to EBITDA that 3.25 times, is that kind of the most restrictive covenant?

Yes, it's probably the one to watch for in terms of capacity and it's certainly not a capacity level we intend to head toward. Less than that would be comfortable for us, but that's probably the one to watch, sure.

And is there an accordion feature in that term loan? Can you expand that at your option or --

No, I cannot. We cannot, excuse me.

Okay. Thanks very much.

We'll go next to Tien-tsin Huang with JPMorgan.

Hey. Hey, thanks. A few questions. On the transaction growth in the US, actually picked up a little bit in the quarter. How much of this was due to market share gains or new ISOs coming on versus a pickup in the underlying macro trends?

I think it's probably a combination of the last two, just we're not seeing the declines we saw before in the market, that is -- as Dan's probably -- or Paul on previous calls talked about in maybe the third quarter was probably the bought am end piece, so maybe a small improvement there. The rest of it is just associated with the ISO's growing and our direct business for new signing this year and our Comerica business had strong years.

Okay. Good. And then just the international side, I was just curious, the operating profit dollars there were flat sequentially. It looked like the revenues were up quite a bit sequentially. So what's driving the Delta there. Was there anything unusual?

Nothing particularly unusual. The thing that's dragging margins a little bit in international is the central Europe business, the indirect business with the major customer renewals we've talked about. The general rule of trends in the UK and Asia have -- Asia is a little more challenged given our exposure to T&E there, but an underlying drag there in central Europe given the indirect model there.

Can you directly tell us where Asia Pac margins exited the year at, roughly?

You know, I'd probably rather stick with the international margin. It continues to expand on a full-year basis. Q4 over Q3 did not move materially, which may be what you're struggling with when you stare at your model with the preliminary results, but I'm not sure I'm ready to quote to that level of detail the margins. The trajectory strong-term as we go long term pass we go through 2010 is upward and upward pretty rapidly.

I've said in the past and I think we're safe saying this is that Asia in the not too distant past had no margin, so Asia has grown to have a margin that is dilutive of course to the company, but I've gone on record as saying I believe Asia given enough time will actually have accretive margins.

Great. No change there. Good to hear. Last question, maybe for you, Paul, just the implications of the Bank of America, the first deal, was that something Global Payments looked at and how could that change the landscape competitively?

Let me take the last part. In terms of changing the landscape, you have a -- you have a big competitor in B of A and first data and they're going to put these two businesses together. It doesn't change the game necessarily. In fact, I think it's fair to say that that is a fairly large effort and I think there's perhaps opportunities for competition while they attempt to put these two together. In terms of our taking a look at this transaction or being interested in it, I think you know that the unique structure of this transaction, basically limited the parties to these two parties. So I think that's the best answer.

Okay. Very clear. Just maybe last one, I'll sneak one more. Does your appetite to do deals change at all on the M&A front?

No, in fact, I think one of the nice things from a challenging economy sometimes is interesting opportunities arise and I think there are great opportunities for us literally in every market, including North America, so I would encourage you to stay tuned.

Great. Thanks so much.

Thanks.

We'll go next to Darren Fogel with Barclays Capital.

Thanks. Could you just talk quickly about HSBC's rational about selling to you the remaining JV and whether there might be any similar opportunities perhaps in the JV with Asia?

I can't speak exactly. I can tell you what they told us. I mean they -- first of all, they're very happy with the deal, and you of course know they actually extended the marketing agreement, so we have a long-term relationship with these guys while they refer business through all their UK operations. They -- although they were happy with that and willing to extend that deal, I think that, they probably came to the realization this is well run, they don't need to have a management role, have a JV board and they always contemplated monetizing their other piece, it was actually in the agreement. They just said, you know, let's get on with that more quickly. We were, of course, delighted to buy 51, even more delighted to buy 100. So I think that's basically it. This is a huge bank, probably arguably the most secure financial institution in the world. I think the only really large bank that didn't take any government assistance.

Right.

I think, -- but that said and done, this -- every little bit helps towards their tier one issues, too, so that could be a small part of it.

And also any potential for following on in Asia?

I think it's a very different operation. It's two different people making those decisions, but, sure, the Asian operation contemplated the same opportunity and we would be interested in doing that as well, but that's all bank driven. As of now, they don't have any interest in exercising that.

Okay. And then just -- you know, you mentioned kind of high level the transaction growth trends in UK and Canada and Asia. Is there any way to give a little more specific color on the numbers gone, is that kind of where they're trending kind of through the quarter.

Probably not other than just to tell you maybe in a different way that, you know, we saw a declining transaction growth as we headed out of the calendar year 2008 and into early '09. That kind of stabilized around February and March and quite honestly, the trends haven't changed materially since then when we look across the board. You know enough about the Canadian market to know it's a low single digit transaction kind of market and we're a fair amount of the market relatively speaking, but as a general rule, not a lot of changes in the last month.

In the US, the 16%, how did that trend in the past three months of the quarter?

In the past three months --

Well, in the three months of the quarter, I mean.

Well, over the course of the quarter, it was consistent.

Okay. And then lastly, on pricing, we've had some questions on -- again, following the First Data deal, if it was going to have an impact on pricing from that, we've heard some anecdotes about some of the larger acquirer being extremely competitive, have you seen that increase at all or is that kind of status quo?

I think in each of the markets, the more mature markets, there's always competitive, especially at the high end, but I wouldn't say that anything abnormal has occurred recently.

Okay. All right. Thanks, guys.

You're welcome.

We'll go next to Andrew Jeffrey with SunTrust.

Hi, guys. Thanks for taking my question.

Hey, Andrew.

As I look at the -- you know, the guidance for flat year on year consolidated operating margin, particularly in light of what's happening in Eastern Europe right now with no necessary indication for a turning point, can you be a little more granular in terms of how you're going to drive margin in the UK and Asia? Is it just scaling some of the investments you've made to date or was -- the implication, obviously, is that you're going to get a pretty big lift internationally from where you were in the fourth quarter, so, kind of how do you get there and is it routable through the year or is it going to be kind of back end loaded.

I'm going to let David answer that in one second, but one thing you didn't throw in was DolEx, too, although we did a pretty good job in margins. There are head winds. Housing starts are up, but construction starts need to kind of follow suit. We need some more -- we need some more encouragement from immigrant labor in sending money home. So that could be a head wind, too, but with that said and done, go ahead, David.

Sure, maybe in reverse order, Andrew. It is kind of routable over of the course of the year, so maybe said another way, it ticks up steadily over the course of the year. To put it in a little bit better perspective, if you kind of look at the two broad international markets that you mentioned, Asia's probably the more ratable of the markets in terms of the expansion that we expect to see largely because that's a scale conversation. It's more volume moving through the system, it's leveraging the back end migrations we've done to date, beginning to leverage a little bit at the margin a couple of markets we've moved to the front end G2 authorization system and then for the UK, it's a couple of things. It's rationalizing the expenses in general as we sort of move through the expense base investment base, we migrated over from the bank. It's beginning now to have that sales force be a little more effective. It's now the sales force we've doubled and it's been on board a good six months or so, so it ought to be more effective as we head through the year without adding incremental sales. Timely -- this is true of both markets by the way, but a couple of price increases in the United Kingdom that obviously should they be successful would be 100% margin. As a result you kind of end up with the UK expansion maybe being a little lumpier overall than the more ratable Asia model expansion you'll be modeling.

Okay. And are you assuming sort of a status quo in Russia? I assume those margins are pretty low right now.

Well, yes. Yes. It's effectively earnings neutral, which means the margins are certainly quite low and we don't assume a radical change. It may exit and it will exit assume if we execute in a position, but on a full year basis, it is a break even business the way you probably have it already.

Okay. And then, Paul, without being specific, at a very high level conceptually, is there any reason to think that -- or let me ask it a different way. Would Global ever consider buying an ISO?

I think the short answer is yes. There are scenarios, there are ISOs that fit a model that would be attractive and I tell you what is not attractive for us. What is not attractive is for us to buy an ISO and then operate thousands of independent sales people and then in effect be competing with our ISO base. But ISOs that have different models, there are levels of attractiveness. So, yes, the answer is yes.

Okay. Thanks.

You're welcome.

We'll go next to Bryan Keane with Credit Suisse.

Hi.

Good afternoon.

Hello. What exchange rate are you using for fiscal guidance with some of the exchange currencies like the Canadian dollar and the pound.

What we've done, Bryan, is kind of looked at the June rates on average in the may is I don't remember geographies and had them weaken a little bit, a point or two over the course of the year. It's kind of interesting when you look at '10 versus '09, with all the movement, all the jumping around in FX in places like Canada and the UK in '09 quarter by quarter, by the time you get out to kind of an average for '09 and an average rate for 2010, they look a lot alike and they look a lot like the June '09 rate. So starting with June '09 and kind of trending that to have it a little -- weaken a little bit, which masks the five or six sources we kind of look at, anybody's guess as to where FX goes, absolutely no expertise, but a couple of sources off of Blomberg and those other guys, but that's the assumption right now that is listed in the guidance.

The US dollars and Canadian dollars closing at a buck [1.09,] that's a significantly stronger Canadian dollar than you had modeled.

Sorry, closed when?

Today it closed.

I have to go back and look at June. To tell you the truth, I didn't look it up today. Wherever June was was our assumption opinion we assume weakens from there. I don't know it's significantly different at all, I suspect it's right on what we're looking at.

You mean the Canadian dollar $0.91 against the US dollar?

Yes, yes, yes.

I wasn't for a second. I was like, wow, we did big movement, that was a big day there on the FX.

No. I flipped it for you.

I was with you, Bryan. Thank you.

And then I guess are David, then, is there a a way to look at FX with positive earnings for this year, it was a drag at $0.23 last year, so what would it be as a positive for earnings in fiscal year 2010?

If you look at the two years side by side and say what kind of growth and earnings do you have, first off, you have to play with the range a little bit, but if you're looking at where you want to be in our range, say it's in the upper quartile of our range or something along those lines, it's worth about 1% or thereabouts of earnings growth which means it's worth a couple of cents and that's our assumption for the moment.

Okay. Couple of cents. So if I X'd out currency, especially on the Canadian dollar, would margins still be able to go up this year or would they be more flat or down?

They still have the opportunity to go up because, remember, those couple points are just -- those couple pennies of earnings are just a couple of million dollars. So they'd still have the opportunity we're describing to go up and then, of course, the complexity of it all is, you can't just focus on Canada, what happens in the UK and central Europe and other places is going to matter as well and they all don't necessarily move in concert which makes this occasionally a mind bending exercise.

Right. Okay. Last question for me, the transaction growth looks like it picked up a little bit, 15 to 16, but the revenue growth in the US kind of dropped down to 7% from 13. Is there anything to read in there?

The thing to read in or the thing to remember when you look at the US by itself is remember we had a number of ISO fees in the third quarter that did not recur again in the fourth quarter. So what you actually saw, if you look at it sequentially without the ISO fees and you know enough to pull, some $10 odd million or so out of revenue for the US because of those fees from the December/January time frame, if you looked at that, you'd see nice solid sequential growth from an ISO perspective compared to Q3 and that explains also your two Deltas in year-over-year performance.

Okay. Great. Thanks for the help.

Thank you.

We'll go next to Julio Quinteros with Goldman Sachs.

Great, can I start with David real quickly on the accounting for the HSBC piece, just to be clear, no intangibles amortization impact when we're thinking about the only impact through the P&L, it's going to be the reversal of the minority interest expense line, I think that was what you suggested?

Yes, that's right, Julio, so you likely in your '09 model have built in some assumption as to what new minority interest expense came in with the UK acquisition. You can sort of essentially take that out of your formula for Q1 and roll from there if that makes sense.

Yes. And so I guess just to that point, though, for fiscal '10, the only piece then that we would have to adjust would be the UK piece, so any sort of ballpark range on what you guys are estimates is left from the minority interest perspective?

No, not really. I mean I guess I'd suggest you probably have the tools to do this because you had to add in a lump of the UK on top of whatever you assumed Asia growth is. Asia is going to grow again, that's the only thing left for you to model in 2010.

Yes, that makes sense. And then I think you -- you did give us or maybe I missed it the CapEx number for fiscal year 2010?

Yes, 45.

45 million. Okay. That's all in, right?

Yes.

Okay. And then the -- just to go back to I think the question that you guys had with -- just a second ago regarding margins, I think, excluding currency, if we adjust out currency, your view is that the underlying operating margin of this business, you're thinking about the US and the other parts of the world is actually -- could expand if you take all the currency situation out of the equation?

Right. So let me say this again. My view is the currency doesn't necessarily drive this expansion, you'll see where currency actually turns out.

Right.

Pieces, Julio, you're talking about a combination of kind of flat to modest decline in North American margin, flat to declining margins in money transfer and then expanding margin international. At the same time you're going to keep your corporate expenses kind of flat year-over-year and all in that gives us the opportunity for basis point expansion in the margin when you start -- starting to model at the high end of our range.

Got it. Okay. Yes. That's right. That's what I was trying to understand. And then -- I'm sorry?

I said okay. Sorry.

Yes. No. Sorry, that's fine. Okay. I'll stop there. I think that's good. Thanks a lot, guys.

Thanks, Julio.

We'll go next to Kartik Mehta with North Coast Research.

Paul, I had a question on your UK joint venture. If you look at this transaction now that you own 100% of it, is it -- does this change strategically or structurally for you in the -- in Europe or UK or was this just a financial transaction that's beneficial for Global Payments?

That's a great question. I would think it's -- there are some things that have changed because we own 100% of this business. We had a -- we had a noncompete with HSBC that was part of that. We no longer have that. But I wouldn't want you to jump into an assumption that we're going to go buy someone else in the UK. We have a pretty big market share of the UK today and I'm very happy with our market position. Other than that, it's pretty much the same. It was an attractive opportunity for us, made sense for the bank and we executed on it.

Okay. You talk about the North American margins being flat or declining in 2010. Is that just a function of more ISO business and so that's why it stays there or are there other inputs other than that, also, in that?

The single biggest driver, Kartik, continues to be the growth from the ISO channel and obviously the impact of that on the margins.

Okay. And, Paul, last question for you, the recent credit card legislation, the impact on your business, will there be any impact on the merchant acquiring business because of that? If so, do you have to change your strategy in any way to benefit from that?

Kartik, I think the short answer is no. We don't see any immediate kind of impact. We are, of course, staying very close to everything that's happening. Most of it is focused on card issuing, by definition, it's a three-legged stool and the card issuing is a very important process, too. So anything that really discouraged card issuers would be negative for us. But we -- we don't see anything clearly in the next couple of quarters or even for fiscal 2010 that would have any impact, but, let's all stay tuned to that one.

Thank you very much.

You're welcome.

We'll go next to David Koning with Robert W. Baird.

Yes, hey, guys. Coming back to Kartik's question a little bit about margins flat to down a little in North America, that's a lot less decline, I guess, than last year when it was, I think, over 200 basis points of margin decline. Is the reduction in the margin decline, is that a function of the ISOs not growing quite as fast in 2010 or maybe the direct business starting to grow a little better?

We're certainly benefiting from a direct business that had a pretty reasonable sales year in 2009, so the volume will come on in 2010. We still are anticipating nice growth in the ISOs and not a change in the trends you've seen. I'd suggest that you that we've done a fairly nice job probably of right sizing the cost base to support those businesses and that's probably the one thing that it's not visible to you, but it's sort of the missing factor in that equation for you, I guess, Dave.

Thanks. Secondly, the G2 savings, it sounds like there were comments that fiscal 2011 is going to be where more of a tangible benefit comes from G2. Is that the way are right way to think about it, 2010, we can't really see it in the numbers, but 2011, it will be a little bit more visible?

That's exactly right.

Okay. Okay. And then finally, if we look at the full year free cash flow and adjust out the settlement stuff and the minority interest distribution stuff, it looks like free cash flow is about $3 per share this year compared to, I guess, $2.20 or whatever it was of EPS, so a pretty big gap. Should we at least think of free cash flow a little bit higher going forward than earnings? That was a really big year?

Wow, free cash flow is a tough one for us right now and I'll confess to you the reason we talked a bit about cash earnings on this call is we're getting our arms around that and we'll see how that goes, but I know a lot of you guys, you particularly, model that in and talk about it. Free cash flow is a little bit further away for us in terms of being able to very crisply define it for you and explain movements. So your numbers, by the way, because I know your definition, are not far off from what you're seeing. We still believe, I still believe we're a solid free cash flow generator, but the moving parts make that a little difficult for me to explain to you in a really quick sound bite the way it needs to be. So aisle he probably stay away from inning your specific question for that reason. But you're not on the wrong track if that helps enough, Dave, I'm sorry.

Yes, that's great. Good job, guys.

We'll go next to Moshe Katri with Cowen and Company.

Maybe you can give us your view on the recent events I guess taking place related to interchange regulation? Where do you think we are on that -- on that part? Has there been any impact on volume growth because of the credit card act that came through about a month, two months ago? Thanks.

Okay. Well, Moshe, I think that firstly, I think the credit card act, a lot of things that were discussed in that, were probably -- at least in in my thinking, I'm not a card issuer, but I think a lot of that stuff was appropriate and I think at the end of the day, if it's consumer friendly, you might actually stimulate some credit card usage. In terms of interchange, I've always maintained that interchange rates will decline over time. I'm still holding to that. And there's nothing legislative that I can point to that will cause that. I think it will be -- that will be one of the factors, but over time interchange rates will clearly decline and I think that's one of the investment pieces that everyone should have for our company and others in our space.

And maybe talk in that context in terms of what that happens or the potential impact or benefits to Global Payments from that scenario.

Well, Moshe in the past it's happened and MasterCard in particular did a -- had a big movement. You saw what happened in Canada with just introductions of a much more complicated multi tiered interchange level. So when these opportunities happen, because of the broad base of medium-sized customers, we are able to mark up a little bit, round a little bit and at the end of the day, although it's a highly competitive market and you clearly have to be appropriate with your customers or you'll lose them, you can take advantage of that and, a basis point here and a basis point there, tens of millions of volume is significant amount of earnings. That's exactly what we've seen in the past. I maintain we'll see it in the future. With that said and done, we're not forecasting any of that in for 2010. You're really discussing more of a long-term trend in my kind of prognosis for the future.

Thanks.

You're welcome, Moshe.

We'll go next to Larry Berlin with First Analysis.

Good afternoon, guys, I hope you're doing well down there.

Hey, Larry.

Quick question, I've been reading too many newspapers and magazines lately, but one mentioned that the pricing for ISOs and the way you guys pay them, it didn't mention you in specific, but person want acquires in general is changing for a bigger up front free and more residual. Are you guys seeing that and, if so, how is that effecting you?

You'll have to tell us what newspaper or magazine you've been reading.

Transaction World.

Well, it hasn't come to (Inaudible) -- it hasn't come to my attention. We're not offering that type of structure here. I would be surprised to see that because the number of transactions that an ISO is going to send to us as a processor is largely their control. It's based upon the merchant's performance, so it would be hard for us to guess a number to prepay, but our pricing structure has been the same for the last ten years that we've been in this business and right now we don't see a change.

Then one other quick thing. I know someone else asked about direct sales a few minutes ago, but just curious what you guys are doing to alter, improve, alter -- whatever with the US direct sales efforts.

Larry, it's pretty much -- we haven't had a big change in the last quarter and -- or even the last year. We have the same relative number of sales people in North America we had in the beginning of the year. We, beefed up a lot in Asia. We intend to double the effort in Russia, but in the UK, we've also increased that fairly significantly. But pretty much domestically it's been straightforward. Now, we do -- if you're alluding to opportunities, potentially with the B of A merger with First Data, we do think there's opportunities there and we think that our sales force are focused on that and that may offer a -- an ability to augment those forces somewhat. So we'll let you know.

Great. Thanks, guys.

Okay, Larry, good talking with you.

Good talking with you.

We'll go next to Greg Smith with Duncan Williams.

Hey, guys.

Hi, Greg.

The -- I guess, David, the 20 million in amortization you gave to kind of calculate cash EPS, that was 20 for fiscal '09, 29 million for fiscal 2010, that's an after-tax number, correct?

No, that's the number you would add back to pretax income or I think what we call -- what's our word on the P&L, I'm sorry, I'm having a moment here. Income before taxes we call on the face of the P&L, excuse me, that's the formal name for it.

Okay. We should add that -- add that essentially thaw pretax and then tax that whole number?

Right.

Is what you're saying.

That's for simplicity sake.

Okay. But what about -- and then that does not include stock comp expense, does it?

No. We have not pulled that out. This is a very simple definition of just the exclusion of acquisition related intangibles.

Yes, okay. Because most of your competitors also exclude the stock comp expense, too.

Well, at the end of the day I wanted to give you the simplest number possible since we're not talking about guiding the cash earnings, I didn't want to give you a complex definition, and when I read the bulk of the notes and talk to the bulk of the folks who are interested in this kind of metric, it's all about acquisition relayed intangibles and we'll keep looking at this and want to make sure it's helpful in describing our underlying performance and to the extent it is, we'll talk about it a bit, but it's just amortization.

Okay. Do you have any rough ballpark estimate for share based compensation expense?

Off the top of my head, I do not. I can easily get that to you when we chat either later tonight or tomorrow.

There's essentially no reason you're expecting that to change dramatically from the trends we've been seeing?

No, no, quite the opposite. Great question and thanks for giving the follow-up to be able to answer better.

Okay. And then I guess for Paul, any update on China and the ability to acquire in local currency?

Yes, great question, Greg. We have passed a number of regulatory hurdles. There are some other things we need to do. We are in the process of meeting with a lot of Chinese institutions. CUP has been supportive to date and we're hoping to bring that to conclusion in the not too distant future. So, you know, just a very exciting opportunity for us in PRC.

Okay. Excellent. And then just one last one, just -- it doesn't seem -- we don't seem to see this in your numbers nor your guidance, but anything unusual going on with loss rates, fraud in merchants or on the check business side?

No, we are pleased to report no, no and no to those questions. Another great question.

Great. Thanks, guys.

Okay.

We'll go next to Jason Kupferberg with UBS.

Hey, guys. Hi there. A question regarding just the overall small business environment. Obviously US transaction growth has really held in nicely here, but if you guys taken any kind of close look at measuring the impact of the increased bankruptcies across small businesses in the US and in any way to describe that for us?

Well, I tell you what we do measure. We measure same-store sales to a degree and we also look at how many merchants leave us and then we try to measure why they leave us and going out of business is clearly a reason. Now, that typically impacts our ISOs a little more because they have a smaller merchant base than we. Our mid--sized merchants, we haven't -- we've seen some tick up in that area, but nothing extraordinary. So we're -- I think that the proof in the pudding here is that we're able to produce these results and have this growth in this environment and live with all of those realities, so I don't know if that's helpful. I think -- and just -- no one asked, yet, but we'll volunteer. June looks kind of the same as May. You're not seeing anything getting -- we're not seeing any worsening, not seeing a double dip. We're -- if anything, we have some optimism.

Okay. No, that is helpful. And then, obviously it's early here, but since you guys talked about the fact that the platform consolidation should really start to drive some margin improvement in fiscal 2011, anyway you can point us towards thinking about order of magnitude there?

I would say large. I would say more specifically, I guess, stay tuned, but we're probably unlikely to put ourselves in a position of reconciling that for you dollar for dollar on a quarterly basis. But stay tuned. We owe you more information.

But clearly, I mean not to be flippant, I mean we talked about this for a long, long time, so everyone is saying so where's the beef here. You're going to get the beef in fiscal 2011. It is going to be meaningful. We've kind of guided kind of just generally what meaningful is and as David said, we'll give some more data when we can.

Okay. Last question from me, just any further thoughts on the strategic value of the money transfer business? I know you're going to try and keep margins hanging in there, but macro environment is what it is and maybe they'll slip a little bit in fiscal 2010. So once the overall environment picks up, does it make sense for you guys to consider trying to monetize the asset?

Yes, that's a great question. We have some wonderful people that run this business and they're doing a great job in a difficult time, but the business is not core and I think everyone knows that and -- but I wouldn't expect us to be selling this asset any time soon. In fact, we have a commitment to management to give them the assets to run this thing and, you know, we have expectations they'll continue to do the best job in a challenging environment.

Okay. Good luck. Thanks, guys.

Thank you.

We'll go next to Robert Dodd with Morgan Keegan.

Hi, guys. I know you don't normally give much color about trends during a quarter and you just gave a little bit a moment ago, but I don't know if you've seen the AmEx results either. During June, it was the best month of their quarter. I mean is there any additional color you can give us on trends that you've seen, not just obviously in the US, but the UK as well and maybe even in Canada?

Robert, it's David. I think there probably isn't much more additional color. If you think back to some of the questions we've answered, really in almost all the markets we serve, whether it's Canada, the UK, across the Asian markets and the US, the trends in June not wildly different from May and the trends have been fairly consistent really since, I don't know, kind of the end of the first calendar quarter of the year. They've gotten better, by the way, but haven't gotten worse anywhere either.

Got it. On the UK business, obviously now you own it -- you've got complete control, so you can decide exactly how you want to go about growing that. What's your view -- and you've discussed this a little bit in the past about expanding it into Europe and where would you stand from a sales force slash platform position to be able to do that?

Well, there's two-ways to expand into Europe. The first way is to follow your trance European merchants and we are very focused on that. And the second is to do strategic deals in -- on the continent and we are focused on that as well. Jim, you want to add any color?

Part of the expansion to Europe, though, which was supposed to be now in place, until they rationalize their debit scheme throughout the major countries, following customers outside -- or bricks and mortar customers are more challenging, but one of the reasons beyond the fact that we think this is a terrific business that we made the investment in the UK and then just doubled down on it is it gives us a management team -- similar to Canada, it gives us a management team in the region to be able to expand across Europe. So it's our expectation that we will be making investments in those markets, we will follow our customers into those markets, [except] for we'll help and opportunities to buy. They will be things that we're going to pay close attention to.

Thank you. And one final one if I can. When looking at the margin complex last year, by my calculation, in North America, the vast majority of that looked to be coming from just the Canadian dollar exchange rate. Is that the -- the biggest reason that -- this year, if you're factoring in essentially flattish exchange rates over the course of the year, we should be looking for basically flat margins?

Well, it helps you at the margin, but it's really not a material contributor to holding flat or the opportunity for a little bit of basis point expansion. It comes down to some of the items we talked about earlier, solid progress in the US off of some nice direct sales, solid cost management and continued nice operating performance from Canada. But you are correct in thinking that the FX makes that a bit of an odd conversation. It can help you a little bit spending where rates go, maybe it keeps you flat or holds you back a little bit depending on if you go the other direction.

Thanks.

Thank you.

We'll go next to Franco Turrinelli from William Blair.

Questions have been asked.

Thank you. We'll take our last question with Bob Napoli from Piper Jaffray.

Hello, this is Jason Deleeuw calling in for Bob. I was wondering, you guys spoke about Visa and MasterCard making a push into debit in Canada and talked about the opportunities there. Do you see those as more of a potential pricing benefits or volume benefits?

I think it's a -- I think it's pricing benefit primarily. I think the consumer would -- it's a huge debit market today. It was -- I mean it's probably the largest, maybe Iceland's just -- took over the number one spot, but Canada is a huge debit market, it clearly was an early adopter and it's very penetrated. This would be someone using a different brand for other reasons and there would be some pricing opportunities.

At the point of sale, we generally control all credit and debit gift, years ago, ten years ago, they had a split market between Visa and MasterCard acquires. That's long since gone. So if there's a different card type that becomes available in the market or different structure under Visa Master Card, it would be likely that we would just take that additional volume up and then it would be priced appropriately.

I will just add this, it is -- I believe it's in the consumer's interest and that's why this could be an interesting argument to watch, the consumer clearly is benefited by allowing those brands into Canada because today they're disadvantaged. Interact brand does not have universal acceptability the way the Visa, MasterCard brands do and the Canadian citizen, if that's their only choice, they're at a disadvantage. So interesting stuff.

Thank you very much.

You're welcome. Ladies and gentlemen, thank you so much for joining us on our call today and we appreciate your support of Global Payments.

Thank you. Ladies and gentlemen, this conference will be available for replay starting today at 8 p.m. Eastern time and ending at 8 p.m. Eastern time on August 5, 2009. If you wish to listen to the replay, please dial 1-888-203-1112 or international participants may dial 1-719-457-0820 and enter the pass code 6591045. This concludes our conference for today. Thank you for your participation. You may now disconnect.