環匯 (GPN) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Global Payments second quarter fiscal 2010 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 is being 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 2010 second quarter conference call. Our call today is scheduled for one hour and joining me on the call are Paul Garcia, Chairman and CEO, Jim Kelly, President and COO, and Dave Mangum, 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, and in addition, some of the comments made on this call may refer to certain measures for full year fiscal 2009, which are not in accordance with GAAP. Management believes that these results more clearly reflect comparative operating performance. For full reconciliation of normalized to GAAP results and accordance with Regulation G, please see our press releases filed as an exhibit to our Form 8-K dated January 7th, 2010, 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 happy new year everyone. Thank you for joining us this afternoon.

For our fiscal 2010 second quarter, we delivered solid financial performance with revenue growth of 12%, to $409 million, and diluted earnings per share from Continuing Operations of $0.71 or 25% growth compared to last year. These results exclude our money transfer segment, which we have classified as a discontinued operation. David will provide more detail on this in just a moment. We did get a lift from currency translation in the quarter. Therefore, from a constant currency perspective, second quarter revenue and EPS growth would be 11% and 20% respectively.

Our North American merchant services revenue grew 10% for the quarter, driven by strong performance from our ISO channel, as evidenced by US transaction growth of 19%. Average ticket amounts were flat sequentially, and down 9% from last year. This is actually encouraging, but it's too early to determine whether this portends for a positive trend. Our Canadian business continues to be affected by overall macroeconomic conditions, driving large national merchants to heavily discount merchandise and, thus, take a larger proportional share of transactions away from the small and mid-sized merchants that provide higher revenue and margins to us. This overall mix shift was partially offset in the quarter by a favorable Canadian currency exchange rate.

International merchant services delivered revenue growth of 15%, driven in part by excellent performance by United Card Services in Russia. Our UK business continues to execute well, despite a macro environment and an unfavorable currency exchange rate compared to last year. Our Asia-Pacific business grew 7% for the quarter, and continues to take market share and gain scale. Though still experiencing softness due to the macroeconomic environment, we continue to anticipate full year revenue growth in the mid-teens from that region.

Finally, I am pleased to report that we are making solid progress towards closing the divestiture of our money transfer business. And we hope the deal can be finalized in the March/April time frame. Now, here's David to discuss the financial details. David?

Thanks, Paul. I'll review currency trends, operating margins, balance sheet, cash flow and financial statement presentation.

During the second quarter, the dollar weakened against the Canadian dollar, but actually strengthened against the British pound and although our revenue and earnings expectations allow for some additional weakening at the margin, it would not surprise us to see the US dollar strengthen a bit from current levels. We believe our expectations accommodate this possible range of outcomes, but any fluctuations in currency rates of course may cause variances to our outlook. From a constant currency perspective, the overall weakened US dollar added about $4.5 million of revenue or 1 percentage point of growth and $0.03 per share or 5 percentage points of growth to our second quarter results.

Total Company operating margins from continuing operations for the second quarter were about what we expected at 21.7%, up from 21.3% last year. On a year-over-year basis, North America margins were affected by the difficult Canadian revenue mix Paul discussed earlier, partially offset by currency exchange rate benefits. International merchant services margins benefited from continued solid performance in the United Kingdom and Asia-Pacific. In Asia, we expect revenue growth to return to the mid-teens in the third quarter. We continue to see the opportunity for modestly expanding total Company margins for the full year, but the revenue mix situation in Canada may make this more challenging to achieve.

We reported an effective tax rate for the quarter of 29%, due to some international tax initiatives that bore fruit during the quarter. We now expect our full year fiscal 2010 effective tax rate to fall between 31% and 32%. Our share count for the second quarter was up to 82.2 million due to recent performance in our share price. For modeling purposes, we suggest you assume about 83 million shares for each of the third and fourth quarters, for a full year average share count of about 82.5 million. This will likely have a negative effect on 2010 earnings per share of about $0.01 compared to previous assumptions. Similar to last quarter, we have total cash and cash equivalents of about $1 billion, due to the quarter ending on a Monday. In fact, our total available cash at the end of the quarter was a little over $200 million.

Now, relative to cash earnings, amortization expense for continued operations after noncontrolling interest for the second quarter totaled $7.2 million, and we expect about $29 million in total for the full year. Please note that amortization will fluctuate over the course of the year due to currency translation. In the discontinued operations presentation, you will see some one-time charges and tax benefits associated with the divestiture. And we expect to record some modest additional charges when we close the transaction.

This quarter we recorded non-cash pretax divestiture related charges of $15.9 million, offset by tax benefits of $18.8 million. The combination actually increased our diluted earnings per share from discontinued operations by over $0.03 this quarter. Please note that these divestiture charges were not included in our earnings expectation for money transfer for fiscal 2010. Our full year outlook for diluted earnings per share from discontinued operations from money transfer included about $0.12 from money transfer. For the second quarter, excluding these divestiture related items, diluted earnings per share for money transfer would have been about $0.025.

Now I'll turn the call back over to Paul.

Thanks, David. Based on our current outlook for continuing operations, we expect 2010 annual revenue of $1.580 billion to $1.615 billion or 8 to 10% growth over fiscal 2009. Also, we are increasing our fiscal 2010 diluted EPS expectations to $2.35 to $2.46, reflecting 12% to 17% growth over fiscal 2009.

Before we go to questions, I'd like to address the 8-K filed earlier this week- That updated my employment agreement. This agreement commits me to a minimum of 3.5 additional years and reflects the Board's appreciation for our performance. I look forward to executing upon the many opportunities we have at Global Payments to expand our global presence and market reach. And I feel confident that we will deliver on these opportunities. I am excited about the future.

Operator, we will now go to questions.

Thank you, ladies and gentlemen. We will now conduct a question-and-answer session. (Operator Instructions). We'll go first to Bryan Keane with Credit Suisse.

Hi, good afternoon. Just wanted to ask about the guidance, obviously the first half of the year looks pretty strong and then in order to back into your guidance. there would have to be some deterioration in the growth rates in both revenue and in some of the profit. So I don't know, maybe you can help us with that, David, to walk us through why there would be some sequential pressure on revenue, especially when you're going to get more currency benefit I think going into the second half.

Bryan, I would be happy to give you some color. I think the end of your question really starts off the right place to talk about how we see the next couple of quarters shaping.

It really starts on the macro level. Then maybe I'll touch on some of the businesses themselves. So if you think about where we are year-to-date, Q1 as you know we were about where we expected to be in terms of our EPS plan, maybe a little bit better tax rate than we thought. In Q2, a little more of the same, little better tax rate, discrete help from an item in Canada, a little help from FX in Canada specifically that helped offset some of the revenue challenges we're seeing right now in Canada. So thus as we sit here today, we're a little ahead in EPS but it's primarily due to better tax rate and currency results. Results of the business operations are about what we expected. If you turn now to Q3 into Q4, we aren't yet seeing any of the global improvements in volume and transactions that I know we would all like to see so we're certainly still cautious on the macroeconomic environment, that's one factor.

Also, just to mention, we have some real macro driven challenges in Canada, which as you know is a major contributor to our margins and bottom line. If you then turn to FX, you asked a great question about what's going to happen with the dollar. Obviously we don't have any clue, relatively speaking, in terms of analytics or forecasting ability, but we have certainly seen the US dollar actually strengthen recently and we really don't expect a whole lot more sequential weakening of the dollar, in Q3 and Q4. Let me give you a couple examples of that.

As we exit December, the dollar's literally stronger now against the pound than it was in Q2, also a little stronger against the Euro and just a hair weaker against the Canadian dollar when you compare it to the second quarter levels. So if you look at our range, we allow still for some more sequential weakening of the dollar in our expectations, the bottom end of the range allows for more sequential strengthening but we really don't see an awful lot more weakening of the dollar to come. We allowed for some but not an awful lot more. To summarize sort of at that level, on a sequential basis we don't see a whole lot of tailwind coming from FX or massive improvement in volumes of transaction that would help offset some of the seasonal weakness we expect to see on the global business.

Let's touch on the business for just a second. Without that help from the rapid tailwinds, what I think we're starting to see is as we expand globally, a bit more of a stronger pattern of seasonality for the quarterly flow, frankly of both revenue and earnings, but more specifically earnings, due to the fact that we're starting to see similar patterns for income in almost all of our geographies, so if you're used to seeing a seasonally weak third quarter from the US and Canada in our results, but we actually see a similar Q3 pattern in our next largest market the UK. In fact, even in Russia our third quarter looks very light compared to the second quarter, much lighter than the second quarter. So with the exception of some of our markets in Asia, each market we serve steps down pretty substantially in Q3 from Q2. And then it comes back a bit in Q4 as you've seen in the past, but certainly not to Q2 levels.

The other things kind of going on just to add a little more color, at the end of the day we get some artificial increases to perceived seasonality, which hit the timing of some of our POS terminal sales in Europe, even the timing of some of the network incentive revenue you guys know we get from time to time in the other markets, relatively highly profitable sales actually happen in Q2 when we actually thought they come in Q3, just sort of exacerbates the seasonality, maybe part of the trick to solving for your model based on the way you phrased your question. And then finally in North America, remember the US has a few less processing days in Q3 than Q2 this year, that's different from last year and previous years and of course the macro challenges in Canada. If you talk about it in margin terms, take a look at history, our general pattern is to post our highest operating margin in the first quarter, a bit lower in the second, then lower margins again in Q3 and Q4.

At a high level, I think it looks like 2010 is following that pattern, but a little bit more than maybe we've seen in the past. All of this is really frankly an extremely long winded way of suggesting we don't think we're wildly inconsistent with some of the traditional patterns you've seen, but clearly the swings we expect in 2010 are more pronounced than one might expect, especially given that we don't think we're going to find these new tailwinds from macro consumer trends or from the FX environment. All in, if you kind of look at this at the end of the day, you look at the full year, we're pretty pleased with our execution, pretty pleased with the idea of being able to grow earnings in a solid fashion in the next couple of quarters on the way to as much as 17% earnings growth for the full year, but it's a long story on the way there. I thought I would give you all the color that's on the top of my head right now.

That will be the first and last question.

Exactly.

Yeah, exactly. I'm good. Just one follow-up on that, David. On the international margins, those continue to surprise. You talked about Canada being a little bit of a hit, but would the the international margins be able to sustain these levels or do we expect that to fall quite a bit as well?

That's a great question. I think if you look international margins, Brian, as we go through the next of the year, they can actually continue to tick up. They'll obviously be down in Q4, just based on the way we describe seasonality. If you compare to consensus, Q3 is the piece of the year where the consensus models probably needed the biggest change to match what we're talking about so you might have the margins international dip down in Q3, then come back again in Q4 so they'll match the pattern of the business but they have the opportunity to continue to expand longer term and they're doing what we hope they will do over the course of the full year.

Okay. Congratulations on the quarter.

Thanks, Bryan.

We'll go next to Bob Napoli with Piper Jaffray.

Thank you. Good afternoon. I think we had this conversation on why the second quarter was going to be a lot weaker than the first quarter on the last call. But I mean, you guys are -- have a history of being very conservative on your guidance and seems like you're even more so now. So I won't even go there because it just seems like the numbers, your guidance is just way too conservative. But that's your history. The margins, the international margins and the US margins, maybe a little bit more color. The US margins hovering -- the North American margins hovering around 25%, while you're having the macro problems in Canada. Maybe a little more color on the outlook for North America margins an your comments on the macro challenges in Canada because seems to me like the macro challenges in Canada, based on all macroeconomic data, should be less than the macro challenges in North America and maybe some other markets.

So just to make sure we're clear on the pieces, Canada's a part of the North America so it --

Right. But your margins were very strong in North America, yet your growth was driven by ISOs in the US.

Yes. Right. Okay, just want to make sure.

Stronger than what we expected, let's put it that way.

Fair question. So if you pull apart the pieces, the way we thought about North America this year is, we're hoping for a year of sort of stabilization in the margins and the margins declines you've seen historically. While we expect North America margins on a full year basis to drop maybe a couple of points from last year, that implies that we actually are growing EBIT in both markets, US and Canada for total EBIT growth overall. It also implies that despite seeing problems in gaming in terms of volume, et cetera, we are doing a better job of matching investment levels and expense levels overall to revenue growth.

The piece we can't control as you properly pointed out is the mix of ISO business. It's clearly the fastest growing but I would not discount the growth and the positive sales success we're seeing in the more profitable direct business, while not huge, it is nicely profitable business and it is growing nicely with a fairly solid sales track record as we exited 2009 into 2010 and then all in Canada is still quite profitable, just not seeing what we hoped for there in terms of a real uptick in margin and the real pain we think we'll see in Canada quite honestly, Bob, comes in Q3 and Q4. This sort of recent trend of the large retailers we have in Canada apparently taking more share, in terms of the total percentage of proportion of transactions, really is just kind of coming into the floor as we exit Q2 and head into Q3 and Q4.

Okay. Follow-up question. You're going to have a lot more cash, somewhat more cash with the sale of money transfer. On the acquisition focus, can you give any update on what you're looking for? Is there any change or are there any other products that you might be interested in like in bill payment products or anything like that and is your focus still heavily outside of the US?

Bob, this is Paul Garcia. So we're primarily focused on merchant acquisition opportunities, both domestically and internationally. We think that the international opportunities are more attractive just because of the growth dynamic but there's a number of attractive opportunities in the US too that we're pursuing. So the pipeline is pretty robust. Doesn't mean that we wouldn't be interested in a product or two that could complement that merchant acquisition strategy. You're right, we're going to deploy that capital towards making some of these acquisitions and hopefully we're very busily working on them and hopefully we'll have some things to discuss.

Thank you.

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

Thanks. I wanted to ask a little bit more about Canada. Is the situation that you're seeing within your portfolio of mix towards big box retailers that you service or is it -- I guess just trying to better understand what's going on exactly with the mix and how that influences your business and maybe if you could give us the volume or the transaction growth in the quarter, that would be helpful.

Let me take the first part of it. I can see your confusion because you've been conditioned to think about the US presence as heavily driven by mid-sized merchants and then of course our ISO strategy. We have a handful of big merchants, although we do have some. Canada is a portfolio that is much more balanced. We have mid-sized, small but we also have a large number of very big merchants. In fact, had a successful quarter in signing lots of big merchants in Canada. Eight fairly good sized merchants we signed last quarter, so we continue to add on to that portfolio. So when David is talking about these numbers, this isn't the industry in total or Canada in total. These are our customers that we are personally observing this. Go ahead, David.

Right. And so when we say stay within just our customers, you're talking about within that base, a couple of our larger big box retailers, the proportion of transactions we have attributed to that subset of customers is higher now than it was, say, two months ago, three months ago, four months ago, so that's really the delta. The overall transaction growth frankly for Canada is about flat for the quarter on a year-over-year basis, so thus you sort of have this situation where that trend can exacerbate the fact that we're roughly flat in terms of transactions, hence a more material impact to it than if we were growing X percent or Y percent.

I see. So it's really the spread impact is what impacted revenue.

Exactly right. So the larger customers by definition come in at a lower spread, hence you end up at the lower margin overall which is the impact you're seeing from Canada.

And so you've seen I guess December, maybe a little bit of January. Can you give us some idea how -- what point did it bottom out in terms of the mix change? Is it getting worse? Is it stabilizing? Just so we can model it through.

It's a great question. So it's tough to see what the trend is, per se. I would say December looked a lot like November so hopefully we did find bottom and we'll have to watch January and February to see if that bears out.

Okay. Okay. Last one and then I'll jump off. Asia-Pac, what's sort of driving your confidence there that that growth rate will accelerate back into the mid-teens?

We had some fairly atypical things happen and actually depressed our growth. We had a pretty good December and we're committed to double-digit growth in that market. I think as we've discussed both personally and on these calls, it isn't so much about did we sign more hotels or is there a dropoff in tourism, that is part of the story for this but this is still a fairly small business. The big emphasis is can we really grow this, and we're convinced that we can and we will and the growth opportunities particularly for China and India are just mind boggling, and so I would say stay tuned on Asia, and hopefully we'll be talking about meaningful numbers in the years to come from that region.

Thank you.

Thank you.

We'll go next to David Koning with RW Baird.

Hi, guys, and congrats on another good quarter. I guess first of all, just in Q2 in the US, your sequential revenue was about about 1%. That's about the best you've had in the last five years in terms of sequential growth in Q2. Q1 was a lot like that, was your best sequential growth in the last five years. Seems like something pretty good is happening in the US, and maybe different than how bad the economy is. Can you walk through why your trends are kind of as good as they've ever been.

The key to the US, particularly given the environment, remains the ISO channel and the ruthlessly efficient sales channel they operate on our behalf. The direct business is performing nicely. The small piece of us that is indirect is actually performing nicely. On a sequential basis it's going to be the ISO performance.

And then I guess secondly, you've talked in the last several quarters about some tough trends in central and Eastern Europe with a couple clients leaving, et cetera. Is that starting to get back into growth mode or is that still struggling?

It's still a challenge. I just want to make sure I clarify. We have not lost any customers in Central Europe. We have renewed our three largest customers and at a time like this in this macro environment, when you're renewing indirect customers when your banks are reselling your product effectively that's a tough renewal to work your way through. The team there has done that and renewed them all and actually it's five new customers, the three largest absolutely have been renewed so we're feeling good about that operationally. But all in, the decline we expect for this year is not finished as we exit Q2. It's a little bit more revenue challenge as we go into Q3 and Q4.

Then by Q1, will that turn back into growth again year-over-year?

Yeah, we're hopeful that I would phrase it a different way. Stay away from talking about specific quarters next year. We're hoping to be able to turn back toward growth in 2011 but let's see how the rest of this shakes. Remember, what we're going to have is mid-year renewals this year that will carry over into 2011. When we get around to talking about 2011 on a full-year basis, we'll have a better picture as to whether or not we can overcome that with volume growth and/or new sales.

Thank you.

Next to Darrin Peller with Barclays Capital.

Thanks. Just a quick question on the US transaction growth rate. Again, it's 19%. Can you first just comment on how you're accomplishing that growth. I know you mentioned before the ISO channel but it went from 20 to 19. It was up from 16 the quarter before. How should we think about that going forward, and also maybe the difference between transaction growth and revenue growth in the US was a lot lower I think this quarter than it had been in prior quarters. So maybe David, if you can explain that as well.

Yeah, I think if you're going to think about transaction growth, Darrin, going forward, mid to high teens is a safe place to think about it. 20 I think of as an anomaly, if we were to see it. 19's a nice strong quarter but that's on the way to a trend. Mid-to-high teens, and let's see how it goes. Toughest thing about all of this is every one of these conversations tonight, the elephant in the room is what does the macro do for this or to this. That's a tough one to pin down. If you think about the pieces of the 19% transaction growth becoming 15% revenue growth and to your point last quarter's differential was about 11 points, we did see average ticket stabilize a bit this quarter as compared to last quarter so on a sequential basis, which obviously helps.

We have a little bit of revenue coming in from Auctionpay. As I mentioned on an earlier question, our indirect business, small as it is, is actually performing well and helping sort of offset that. We didn't see the exact same quarterly performance last quarter from the indirect business and then a little help at the margin from some of the October pricing changes from the association. Probably all in, that explains the pieces. Probably shouldn't surprise you to see that thing range between four or eight or nine points in any given quarter.

Were there any large or meaningful ISO additions or losses during the quarter?

There weren't any to speak of to the extent they were large we probably would have put out an announcement but the base of ISOs has been relatively stable for upwards to four or five years. We add from quarter-to-quarter, we'll add a few ISOs but they tend to be on a smaller size so they wouldn't have that much impact either on the top or bottom line.

We had heard some discussion around some ISOs moving to some pricing competitive players in the market. Maybe you can comment a little bit on pricing in the US.

I don't think the -- I think the story if you went back five years on the ISOs, it's been pretty similar. It's a competitive market. There are a number of providers who provide services to this group, like we do, and I don't see it -- I don't see it changing. I haven't seen it change dramatically. It's competitive. It's been competitive. I'm not expecting it to change.

Okay. Then on the tax rate, Dave, can you just explain. I think you came out around 27 or 28% this quarter. Correct me if I'm wrong, but can you just -- is that a little lower than -- it's a little lower than we had modeled. Maybe just help us understand what we should expect going forward.

Couple different ways to look at our tax rate. I'm speaking to the effective rate. You quoted 27, which is probably the face of the P&L. Either way the dynamic and the delta is roughly the same. So on an effective rate basis we posted about 31.5 in Q1, turned around and posted 29% in Q2. The bulk of that difference is really due to we actually had a reserve for a certain statute in one geography. And that statute expired so we actually could just bring the reserve back into our book. So that created kind of a one-time benefit this quarter.

As we look out for the rest of the year, we're probably looking at 32.5 or thereabouts for Q3 and Q4 on the way to a full year rate that I talked about earlier in the call of I think between 31 and 32%. Now, if you're looking at the face of the P&L, use those same sort of trends I described to build your model for what Q3 and Q4 would be. In other words, you quoted 27 which is a point or two lower than our evidentiary rate. You can apply the same logic to 32.5 that I quoted for Q4.

Thanks, guys.

One last follow-up to your earlier question, I think relative to a note in the market about us losing an ISO. There hasn't been any large ISO losses. We do lose small ones from time to time. There was probably a mid-sized one who we had a piece of the business, I can think of two instances where we've had a piece of the business, somebody else had a piece of the business and they tend to, when they do leave, oftentimes in the case of this one ISO, they sold their business off to another ISO and we may not see as much of the new business but we keep the base.

You do keep the base. That's good. That's very helpful.

Not in all cases but in the two I can think of. In the note I saw it wasn't referenced specifically who but it hasn't been a dramatic impact to the base.

Go next to Jason Kupferberg with UBS.

Thanks, good evening, guys.

Hey, Jason.

So wanted to start with a question on the G2 platform conversion if you can clue us in on where are you at this point. Are you still on track with the time lines you talked about in the past? And then just a follow-up on that same topic. I know it's premature to sketch out exactly quantitatively how much savings you're going to get from the conversion when all is said and done but can you give us any kind of sense of how much of whatever that savings might be will actually get reinvested in the business rather than dropping to the bottom line to the extent that you have a sense for that at this point?

Well, I'll start with the commentary, color on the progress of the roll-out and David can cover the second part of your question. Just to refresh everybody's understanding, we have converted both to our front end and to our back end, the G2 is the front end and our system is the back end. All of the Asia businesses that have been converted, which is seven and that was completed over the summer so the savings associated with those are already reflected in the financials and will be in the guidance that Paul and David provide. We have at the same time as we've worked on the Asia market, we have been actively working on the US and we are through our -- almost through our beta here in the US. We have a number of merchants up and on the system, just to validate, we are where we're expecting to be and I would tell you we feel very confident that the plan is meeting its objective and we anticipate more color on that coming by the end of this year.

I think that's right. So the plan specifics as you guys will recall are for the US migration to be effective the summer, perhaps early fall of 2010. So first quarter, or thereabouts, fiscal 2011 for us, with Canada and the UK to follow. More color on that in the next couple of quarters of calls, just in terms of the roll-out, particularly of the subsequent markets and the timing specifically for the subsequent markets. Now, in terms of the actual financial implications, Jason, I don't think we're going to put a lot of finer point on what we expect right now. We'll clearly as we head deeper into the US migration be in a position to provide more color as we did the Q3 call and obviously more color and more meat on the bone in Q4 when we head into 2011 and expect to see actual financial implications for the migration. In terms of what we reinvest, I think we'll take that one on when we get more specific on the numbers. All in that will be a facts and circumstances decision we make at that time that will reserve a little bit of judgment for that time but a lot more to come, as you know, and we're just happy to be executing as well as we are on the schedule right now.

Okay. That's helpful. And then in the US, as far as the strategy to expand your roster of bank referral partners, any updates there? Do you think we'll see or hear anything significant, perhaps before the end of this current fiscal year?

Jason, we would love to say yes but firstly, a lot of the dance partners are taken.

Yes.

There are opportunities to get somebody to dump their current dance partner and we're working very hard on that. I'm not going to give too much more color, other than that is a great channel and we're working very hard on looking for opportunities and quite frankly, we think we have a compelling story, maybe self-servingly, but we think a better story than anybody for a bank partner.

Okay. And last one from me, just to circle back on M&A a little bit. I mean, conceptually, how big of an acquisition would you guys be comfortable doing, just based on what the capital structure looks like right now for the Company and the kind of leverage ratios you might be comfortable with in the future. If you found kind of the perfect strategic fit where do you really realistically max out from a a size perspective.

That's a tough one. The best predictor of future behavior is past. Our comfort level is typically in the small to medium sized. I think there's a large body of evidence that would suggest that companies that do that typically have a better execution record. However, there are some wonderful opportunities out there and if they fit the criteria you set and were reasonably near term accretive and fit what we wanted to do, then I think that we would stretch and get some things done. I mean, we have access to the capital markets. We have reasonably available lines and these things are self-financing in many regards, if they're everything that you just said and I just said. So I would say that -- I would guide you towards we're looking at deals that are probably medium to small, but if an opportunity presents itself, we would absolutely go after it.

Maybe to add a little more color to the capital structure portion of the question, Jason, we sit right now right about one turn or so of EBITDA and we delever pretty quickly. We generate a fair amount of cash flow, something that we talked about before, we would love to talk a little more with you guys about as we get a little deeper into how we go into free cash flow and even EBITDA. At the end of the day, we could certainly be comfortable with two to three times EBITDA, two to three terms for the right character deals that Paul was just describing.

Thanks for the color, guys.

Go next to Tom McCrohan with Janney.

Hi, guys, thanks for taking the call. Can you break out your 19% transaction growth in the US between debit and credit?

We don't actually break it out particularly discretely but the end of the day we've got 20% plus growth in debit and obviously much more modest growth in credit. We're seeing a lot of growth in signature as well as PIN. PIN remains less than 10% of our total transactions just as it has for some time. All in, the mix isn't wildly shifting. We're getting an awful lot of signature growth.

Thanks. And you sounded cautiously optimistic on the US, given the stabilization in average tickets. Can you give us some sense of what you're seeing in same store sales growth in your merchants in the US?

I don't know if we're going to drill down quite that far. I think the point about the US is we're getting a little bit of help from stabilization and average tickets and that we're pleased really with the relative level of execution in the business, in the indirect side and the sales side that's helping pull the pieces of this together in a fairly solid fashion as the year goes on.

Just a quick last question on cash flow. Since you were talking about it earlier, how should we think about the settlement processing asset and obligations which contributed about $600 million of cash flow for the first half, so is $1 billion of cash on hand a real normalized kind of cash on hand or is some of that going to flow back out to whoever the counterparty is?

It's not ours.

It's a great question. So the end of the day, not only is it going to flow back out, it flowed or flew back out the next day.

It's gone.

So all joking aside, the available cash we have is a little over $200 million. That's a check we could write tomorrow if Paul found a $200 million deal. He was describing a little bit earlier. There's a little bit more of our own cash that we put toward working capital to manage reserves and some of the merchant relationships. The right way to look at that number is take a $0.5 billion or even as much as $600 million out of that number when you look back at previous quarter ends when we didn't end on a Monday, you get more of the normalized view of where cash ought to be. But the $1 billion is absolutely illusory.

Thanks, David.

Thanks, Tom.

Go next to James Kissane with Banc of America/Merrill Lynch.

Thank, guys. Sorry to beat a dead horse, but just want to go back to Canada. Still trying to figure out why it was such a sudden shift in the quarter versus previous quarters. Is there anything going on with pricing with some of the large merchants?

No, nothing specifically going on with pricing. Jim, we really -- we saw maybe the beginnings of this in Q1 but weren't sure. In Q2 is where it kind of came through on the metrics and really changed our view of the trajectory of Canada for the rest of the year. So I wouldn't suggest magically November the first it was a wild sea change but it did come home to roost if you know what I mean as the quarter went on.

Can you give us the mix, I don't think you gave it earlier, the mix in your Canadian business between big box or national retailers versus small?

We really can't, really don't break it down. Try not to drill down too much any one market. In this case if you look at the face of the segment income statement and segment revenue that's we do by country, it's obviously going to stand out and it's worth making sure we talk about it. Certainly what we call these national accounts are big enough that if the volume shifts towards them with their lower spreads, they could move the meter a bit on growth rates.

Relative to the US, where Paul mentioned earlier, he we're more of a mid-market focused while we do have a number of $1 billion plus accounts here, it's not enough to distort the overall US mix. In Canada from the time we made the acquisition in 2001 forward it's always had a pretty good concentration of larger retailer, largest supermarket chain being one example. Not that that's a big box but it's a large piece of our business. And to the extent that gets a bigger part of the share, the margins on those businesses are substantially different than a small or mid-sized store.

Got you. Just one last question. I know it's not that big but David I think you mentioned that Russia was weak. I know that's a recent acquisition. Maybe update there.

I'm glad you asked that question. If I gave you that impression I apologize. When I was talking about Russia. Russia continues to execute very well and is outperforming our expectations for it this year so it's a great part of the story right now and obviously right now we bought Russia for what it could help us deliver over the next two, three, four, five years, more than Q2 or Q3 this year. As we go into Q3, what we're learning as we operate the business, learn more about the market, Q3 is a essentially light year in Russia. It's not that it's going to be weak.

It's actually just going to be seasonally light. The same way we expect that from the US and we've learned the UK last year as well. Sort of making Q3 all in a sequentially seasonally challenging quarter for us. But Russia's performing very well. You just find if you look at the calendar what goes on in Russia, they have a happy January and a lot less transactions over the course of what is our Q3, that December through February period.

Thank you.

We'll go next to Moshe Katri with The Cowen Group.

Thanks for taking my call. Nice quarter. Can you comment on any new pricing initiatives specifically in the UK and were there any contributions from that to margins during the quarter?

We saw the beginnings of our repricing initiatives in the UK this quarter. We're hoping for more impact in Q3 and Q4. I would tell you as we go through the year, we'll probably see a little less impact in the UK from the repricing than we thought. We'll be cautious as we roll that out. It is a tough macro environment and as we work with the bank to get the data and the things we need to know in order to roll out the pricing, we may see a little less impact than what we originally thought. When we roll out the pricing, it actually is in place. It's broad based increase. Didn't really change much of Q2, has more of a quarterly effect in Q3 and again in Q4.

Can we also get an update on some of the dynamics going on in Canada with the Interact.

Sure. I'll do that one. I'll let David answer the last part of the Canadian question about pricing initiatives as well, or Jim. We are ready to roll with the Visa and MasterCard products. Interact of course being the competition and Interact driving 65% of our transactions, debit oriented in Canada today and they're all on Interact. The question is does the Interact model change and what impact does Visa and MasterCard's products have. And we -- all we can do is prepare our platforms to provide those services and we are at that place. And now we are waiting to see like the rest of the world and I would tell you, Moshe, that we really don't have a clue what that's going to mean. I mean, I think it will have an impact. I think it will be slower to build and I think it will be a bit of a tailwind going in the future but it's going to take a little while to really give you guys some clearer guidance on that.

I won't expect what you saw in the interchange changes over the last year and-a-half to two years on the introduction of signature products into Canada where existing cards in the market were chained over overnight to these premium rewards cards as a higher interchange which after the interchange changes were introduced had a big impact for the market. In this new program for the debit products, their issuers will need to place new products into the market so the speed at which those issuers launch those cards will end, acceptance by the merchants and consumers will drive the speed by which you see this initiative.

Could you comment on the ongoing initiative or the ongoing relationship with China Union Pay in terms of where we are.

Moshe, that was part of the question that Tien-tsin asked about Asia. Although Asia, we're very pleased with Asia and we're looking at double-digit growth in Asia, the real opportunity is something much more significant. We have various relationships with CUP. Supporting the CUP card as holders of those cards travel to places outside of China and we are in fact providing those services in a number of countries, and intend on providing them in additional countries, and then the other piece is allowing us to acquire CUP transactions in PRC and mainland China. We acquire CUP transactions today in Hong Kong and Macao, and we're acquiring them now in Taiwan which is a recent development. No one is able to acquire CUP transactions in PRC.

No Western Company.

No Western Company. Thank you very much. You have to be a Chinese institution. Let me be clear on that, right. No Western -- no non-Chinese institution can acquire transactions in PRC. We are fairly far down the road to be given opportunities to do just that. We still have some work to do and we are hoping that in the not too distant future to be sharing with you some more details about our ability to do just that. It's a long, complicated road.

Do you have any preliminary data on some of the transaction volume for example that goes through Beijing?

Yes. We do in a couple different scenarios. We process in Beijing for Visa, MasterCard transactions. We have an idea what CUP transactions are and your question was relative to both of them?

Yes.

Okay. So we're not really going to be giving any forecast on CUP at this time but when we get a little closer to having the ability to do just that, we will be sharing some data with you. In terms of Visa and MasterCard, we know precisely by city, we have offices in ten of them and we just don't break it down to that kind of level, Moshe, as you understand.

Nice quarter, guys.

Thank you very much.

We'll go next to Kartik Mehta with Northcoast Research.

Good afternoon.

Hey, Kartik.

Paul, you said for the acquisitions that you think there's opportunities both domestically and internationally. So on the domestic side, were you implying size or strategic or both in terms of opportunity for Global Payments?

Well, we were talking about portfolios. We're talking about bank portfolios, we're talking about standalone companies and we're talking about companies that are in market niches that provide merchant acquisitions. So all of those categories.

Has the environment changed in the last six months domestically do you believe because of what's happening in the economy or is there another reason maybe more portfolios are available.

You are seeing an uptick in available portfolios and I'm not exactly sure why that is. We are seeing it. I think that your suggestion is as good as any. I think the economy is something to do with it. But we are indeed seeing more opportunities than we've seen in the last couple years.

Now, would it be fair to say that right now margins out of Asia are probably lower than your overall international margins?

That's absolutely correct. In fact, last year we didn't have a margin in Asia. So we actually earned money there. So it's increased by thousands of percent. But we think overall that the margin in Asia will be accretive to our margin in the US.

So does that imply that your Asian margins can get to or exceed your current international margins?

I think it implies we can get to them. Whether it exceeds them, let's see how things shake. That really depends a lot on how fast we see the growth in the early stage markets in Asia.

It's based on the size and we need to complete the conversions but I don't think there's any reason why it can't continue to proceed north.

I think Asia can proceed. It's a dynamic market, it's a faster growing market. I'm not going to give you time frames on that. That could be years and years, right.

Right. And then just last question, Paul. There's been a lot of talk about RBS selling its merchant acquiring business in the UK. Apparently the story that there could be a buyer or there is a buyer for that business. What are the implications of that business being sold for Global Payments.

Sold to Global Payments or sold to someone else who now competes with Global Payments?

I'm assuming it can't be sold to Global Payments so it probably would be somebody who competes with Global Payments.

Kartik, I think that I would say that there's lots of rumors including some newspaper articles that I would tell you are inaccurate. They haven't reached a conclusion to buy -- sell that to any one person at this point. And I really -- that I'm aware of many and we really aren't in a position to comment any further on it and I'll tell you, I wish them a lot of luck with their transaction. But if it does change hands and it goes to someone who competes with us, I think we're very well positioned in all the markets that we're in to compete aggressively with them. One of the reasons they want to sell the asset is they're looking at a huge investment of hundreds of millions of pounds to bring up their infrastructure. So they've got to work to do.

I would add, we have a really solid team that has executed. We've owned the business well over a year now and we're well down the path of a conversion, moving that onto our systems so I think we'll be well positioned regardless of who is the ultimate owner.

Thank you very much.

Thanks, Kartik.

We'll go next to Andrew Jeffrey with SunTrust.

Hey, guys. Good afternoon.

Hi, Andrew.

David, did you call out the UK revenue this quarter? I don't know that I heard it if you did.

No, I did not, Andrew. Once we started fiscal 2010 with a full year under our belts, I did not. We stopped calling it out. I can tell you as we look at the full year you thing about how we talk about the models for 2010, we are looking to see mid single digit growth over all for the UK. You recall last year it was doing 50 to $55 million US a quarter.

How much of that growth is volume versus price?

Well, a lot of it's price, as you might expect. This is a market that's going to be a low single digit, maybe mid single digits in a healthy economic circumstance so it's a combination of a little bit of volume, a fair amount of price, but also, and I think of these as separate, things you may not, it's sales success, bringing in new volume. Rather than call it same store sales volume growth, it's a matter of we really think we're executing well in that market, to Jim and Paul's point a moment ago on a different topic. Doing a pretty solid job bringing in new volume as well to help us grow a shade above what that market can grow in a better macro environment.

I assume that market's not growing at all on a same store sales basis at this point. Probably contracting a bit.

If you think of the English economy, I don't know how anyone could assume anything different. I agree with you.

Remember as well, we're only 17, 18% of the market. We have the opportunity to gain market share in a flat market.

Absolutely and are.

I know you made invest plant in the sales infrastructure in the UK. Does that mean continued investment? Are you pretty comfortable with you are competitively. Seems like maybe you've got a window of opportunity here.

I don't think, as long as we have referrals to feed to the sales group, we'll continue to invest in sales in any market. So I don't see the UK ending in terms of adding resources. It may not grow at the rate that we did in the first year, but we will definitely fill in as opportunities present themselves.

That's really the key, Andrew, in that you recall the first year was a really heavy hiring and training year, it's as we get to the middle of this year that we're hoping to see productive new salespeople and then we can be more targeted in the additions that Jim's talking about.

Although we really do like our position and we think that we are better situated than anybody in that market and we think we're adding market share faster than anybody in that market, it isn't like RBS and Barclays are laying down either. We still have to win business every day.

Okay. Thanks.

Go next to Robert Dodd with Morgan Keegan.

Hi, guys. The risk of boring everybody, I would like to go back to Canada, if I can. A couple of questions. First, when I look at a couple different ways of hacking at the numbers, looks to me like the mix shift in Canada probably cost you $0.04, $0.05 in earnings in the quarter. Is that the right kind of ballpark? And then I take it we're looking at something worse than that in the December, February quarter. And then the second question for Canada would be you've said that your product is ready for Visa, MasterCard, debit introduction in Canada. Have you rolled out a pricing structure to your merchants that encompasses that or is that still pending and is there an opportunity to take some pricing up when you roll out that new kind of unbundled price?

So Robert, I'll try the first part and pass it over to Jim for the second part. Without commenting specifically on your quantification, which I really don't think we'll address, there's enough national account volume to move the meter in Canada, such that you can see the growth trend turn. So in other words, we would have started out this year talking as you were doing your model for 2010 thinking about mid single digit revenue growth in Canada. Now what we're seeing is probably low single digits for the full year including help from FX. That probably gives you enough of a sense to know that these initiatives can be decent size and will, given the relative contribution of our Canadian operation have an impact on the earnings line, not commenting specifically on the number you quantified. It will have more of an effect in the February quarter. So at 50,000 feet, the way you're thinking about it makes sense and your assumptions make sense, again without necessarily commenting on the number itself you quoted. Part two of the question.

In terms of the roll-out, host was done last year, the host being the processing authorization system, and what we've been working toward is enabling our terminals we own and rent to our customers, so these are the small, mid-sized merchants that have now been enabled to be able to accept the cards and the pricing has already been developed and rolled out to our customers as well.

Got it. If I can, one final one, just to be explicit. Have you bid for RBS, the RBS portfolio or business.

Is there another question?

We appreciate the spirit of the question, but as you could suspect, we cannot answer that.

Thank you.

You're welcome.

And that concludes our question-and-answer session. I would like to turn the conference back to Mr. Garcia for closing statement.

Well, thank you and thank you all of you for joining us on today's call. Happy new year and we appreciate your support of Global Payments.