萬事達 (MA) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 MasterCard earnings conference call.

My name is Latasha, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over the Ms.

Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you Latasha.

Good morning, and thank you for joining us today, either by phone or webcast, for a discussion about our second quarter financial results.

With me on the call this morning is Chris McWilton, our Chief Financial Officer; and Tara Maguire, our Corporate Controller.

Following comments by Chris highlighting some key points about the second quarter, we will open up the call for your questions, and in total, the call will last up to one hour.

For your reference, this morning's release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website, www.mastercard.com.

These documents are also been attached to an 8-K that we filed with the SEC this morning.

A replay of this call will be posted on our website for one week until August the 8th.

And finally as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about MasterCard's future performance.

Actual performance could differ materially from what is suggested by our comments today.

Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings.

With that, will now turn the call over the Chris McWilton.

Chris?

Thanks, Barbara, and good morning, everyone.

We are really quite pleased with our second quarter results, especially since this quarter's net revenue represents record performance in the company's history.

Our financials demonstrate the underlying strength of the business, and our ability to leverage the tremendous growth and opportunity in the overall payments business.

Turning to page 2 of the slide deck, we delivered net income of $195 million or $1.43 per share on a diluted basis, excluding special items.

Including special items, we recorded net income of $252 million or $1.85 per share on a diluted basis.

Our record quarterly net revenue of $997 million was driven primarily by strong growth in GDV and process transactions, including cross-border transaction volumes which grew 17.3%.

Finally we saw our operating margin improve 10.3 percentage points to 27.3% from 17.0% in 2006 adjusted for special items, demonstrating the leverageability of our business model.

In addition to the financial results, there are a few business developments from the quarter that I would like to highlight.

In April we announced that our board had approved plans for certain accelerated Class B share conversions in 2007 and a $500 million Class A share repurchase, subject to shareholder approval of changes to our corporate charter.

In June after receiving shareholder approval, at our annual meeting, we provided some detail about the mechanics of the Class B conversion process.

As a reminder, the initial conversion window will extend from Saturday August 4th through Friday October 5th.

We expect to provide you with an update on the initial conversion and our share repurchase program as part of our third quarter earnings announcement.

Also in June, we announced that we reached an agreement to resolve our contract dispute related to sponsorship of the 2010 and 2014 World Cup soccer events.

As you probably recall, we discontinued our sponsorship of the World Cup soccer events and received a total of $90 million as compensation.

These funds will be used for general corporate purposes as business needs are identified.

We believe we now have greater flexibility to shift marketing resources originally earmarked for World Cup to drive and execute marketing programs at the regional and local levels.

Finally, I am sure many of you have heard about the RedeCard IPO that took place last month.

RedeCard is a merchant acquirer and processor in Brazil, which, up until last month was owned by three financial institutions and MasterCard.

Post IPO we continue to hold a 4% stake in the company, an investment we made in 1996 which has appreciated substantially.

We have entered into a lock-up agreement for our shares that if we elect to sell our shares include some restrictions on timing and pricing of sales to non-qualified institutional borrowers during the 12 months following the closing of RedeCard IPO.

If and when we decide to sell our RedeCard shares, we will disclose the details in the ordinary course.

I want to emphasize that RedeCard is an important customer of MasterCard and continues to be a strong ally in the development of our business in Brazil.

With that, let's turn to page 3 of the slide deck for more details on the financials.

As I mentioned, net revenue for the quarter was $997 million, a 17.8% increase over 2006, currency fluctuation of the euro relative to the US dollar contributed approximately 2 percentage points of the revenue increase.

There were two special items we highlighted in the second quarter of 2007.

First, a $3.4 million reserve recorded for a litigation settlement, and $90 million in other income related to the World Cup settlement I just mentioned.

We have several special items in the second quarter of 2006, relating to our IPO and the establishment of the MasterCard foundation; Appendix A of the slide deck provides a comprehensive summary of these special items.

Turning to page 4, in the second quarter, we experienced continued growth in both GDV and processed transactions across all regions.

GDV grew 13.3% on a local currency basis and 16.4% on a US dollar-converted basis to $555 billion.

The second quarter was the 13th consecutive quarter of double-digit GDV growth on a local currency basis.

Although not shown on page 4, purchase volume was up 14.8% on a local currency basis, and cash volume was up 9% on a local currency basis.

Additionally cross-border transaction volume, or the volume that is generated from cardholders who travel outside of the country where their card is issued was up 17.3%.

While the United States remains our largest region in terms of both volume and revenue, regions outside of the US, such as South Asia, Middle East and Africa, and Latin America continue to grow at a faster rate, demonstrating the global strength of our business.

As we discussed in the past, one of the metrics we focused on is revenue yield, or net revenue per thousand dollars of GDV.

This metric was 18 basis points in the quarter versus 17.8 basis points in the second quarter of last year.

This metric has been relatively steady.

It is flat versus the first quarter of 2007, and slightly higher on a year-over-year basis due principally to the strength in international transaction volumes.

Process transactions, or the transactions processed across MasterCard's network, increased 15.2% to 14.6 billion (number corrected by Barbara Gasper later in the call) in the quarter.

You will note this growth rate is down versus recent quarters due to the anniversary of a large debit issuer conversion that took place primarily in the second quarter of 2006.

Additional details about our operating performance can be found on page 9 of our earnings press release and on the IR section of our website.

On page 5, we show that net assessments increased $34 million or 14.5% to $268 million.

Gross assessments increased $59 million, or 13.3% over 2006 due to strong GDV growth.

Although we did not have the impact of conversion costs for a large debit issuer that occurred in the second quarter of 2006, our assessment rebates and incentives grew 12% versus last year.

this is primarily due to accruals earlier in the year based upon MasterCard-specific performance versus previous years.

Turning to page 6, you can see the net operations fees increased $117 million, or 19.1% to $729 million.

Gross operations fees increased $132 million, or 19.6%.

This growth was driven by two factors, first, growth in processed transactions, gross dollar volume and cross-border transaction volume that I previously described on Slide 4; and second, growth in authorization settlement, and switch revenue which was driven by higher utilization of stand-in authorization services as well as pricing changes for these services.

Stand-in occurs when the issuer's primary authorization routing options fail and MasterCard can stand in on behalf of the issuer and approve the request based upon issuer-defined parameters.

While the price change did not materially contribute to overall revenue growth, it is an example of how we can increase prices in targeted areas, based on the enhanced value we bring to our customers.

Please turn now to page 7 for some detail on expenses.

During the second quarter, total operating expenses increased 3.2% to $725 million, excluding special items.

This increase was mainly driven by an 18.2% increase in general and administrative expenses, primarily due to two factors.

First, an increase in personnel cost related to the planned hiring of additional staff and contractors to support our customer-focused strategy; second, an increase in professional fees related to external costs to advance our key strategic initiatives and legal costs to defend outstanding litigations.

Offsetting the increase in G&A was a 12.6% decrease in advertising and marketing expenses, reflecting significant World Cup sponsorship activity in the second quarter of last year, as well as a planned shift in A&M spending to the third and fourth quarters of this year.

Including special items, operating expenses decreased 35% to $728 million, currency fluctuation of the euro relative to the US dollar negatively impacted a decrease in total operating expenses by approximately 0.7 percentage points for the quarter.

Moving to the cash flow and balance sheet highlights on page 8, we generated $446 million in cash flow from operations during the first six months of 2007.

We ended the quarter with $2.8 billion in cash, cash equivalents and available for sale securities.

We also had $2.9 billion in stockholders equity.

Prepaid expenses increased $65 million, primarily due to higher customer incentives and advertising expenses.

Finally, $80 million of ten-year unsecured subordinated notes which mature on June 30, 2008 were reclassified from long-term debt to short-term debt.

Turning to page 9, there are a few items that I would like to highlight for your consideration as you refine and update your models for the balance of 2007.

First, there were no special items in the third quarter of 2006.

In the fourth quarter of 2006, we had $2 million of litigation settlements.

Second, given our plans for the remainder of 2007, we believe in the second half of 2007, our G&A will grow at a rate similar to the rate we experienced in the first half of the year.

Third, as I mentioned in the past and would like to reiterate, we anticipate very modest full-year growth in A&M in 2007.

Within this framework we expect the third quarter spend be higher than the second quarter, and the fourth quarter spend to be the highest of the year.

This will also result in a more even distribution of A&M spend between the third and fourth quarters relative to prior years.

Finally, on a go-forward basis, our RedeCard investment will be marked to market on our balance sheet.

Gains and losses will not be recognized in our P&L until and unless we sell the securities.

Well, to wrap up we are quite pleased with our performance in the quarter and believe the business continues to show great momentum.

Our second quarter results clearly demonstrate our success in penetrating the global payments opportunity, and our ability to improve our business while focusing on delivering customized solutions for our customers and merchants.

We're now ready to begin the question and answer period.

In order to get to as many people as possible in our allotted one-hour time frame, we ask that you limit yourself to a single question with one follow-up, and then requeue if you have additional questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Liz Grausam with Goldman Sachs.

Please proceed.

Thanks, just wondering on your rebates and incentive line -- this has been growing fairly rapidly in both growth -- in both assessments and in operations fees in 2005 and 2006, and it really seems to have slowed down.

Can you help us understand some of the dynamics, whether it be mix between US and overseas and how that is effecting your rebates and incentives, and also in the domestic market how you might see pricing changing a bit over the course of the last two years.

I think we talked about it in the past.

It can be a little challenging and daunting to analyze rebates and incentives, sequential quarter over quarter growth because of the way we conduct business.

For instance, we had a large debit card conversion that took place, during the second quarter last year which is going to impact our growth rates quarter-to-quarter.

I continue to encourage you not to overtorture these rebate incentive numbers.

We look at this business on a net revenue yield basis, that's what I have talked about in the past-the 18 basis points on volume that we experienced in the quarter.

As we said, we expect a gentle downdraft on those basis point yields over time.

We have been very fortunate so far that we have been able to maintain that yield.

We're flat to the last year, and actually up 0.2 basis points versus the first quarter.

So again, that's the way we look at the business.

We don't have a Vice President of Rebates and Incentives.

We don't have a Vice President of Operations.

We don't have a Vice President of Assessments.

We're trying to drive business to our customers in a way that maximizes the profit potential of their businesses and makes sure that we maintain that revenue yield at acceptable levels.

Great and just a follow-up, back on revenue and just the GDV trends you see - certainly very strong, and stronger than we'd expected particularly in the first quarter and the second quarter.

Help us understand here, are cross-border transactions outperforming your own internal expectations?

What do you think that's driven by?

Is it new account wins that you have been able to bring on board or really just emerging market growth that is outsized relative to your expectations.

I think it's a all of the above.

We are definitely winning deals.

You heard, on Investor Day, our Chief Operating Officer talk about the number of deals we are winning versus our major competitors.

The travel markets do remain healthy.

Fortunately, knock on wood, there has been no geopolitical events or terrorist activities that have slowed down international travel and as you can see from the volume figures that we put in the slide deck and ourearnings release, the international markets are doing very well.

Latin America, South Asia, Middle East, Africa, Asia-Pacific all doing very well.

And as I mentioned on the call last time, these are the markets that are really driving a lot of the growth for the company, and we're well positioned as a unified global company to take advantage of those trends.

So very happy on all fronts and I think you hit pretty much all of the drivers, Liz.

Great.

Thanks a lot, Chris.

Before we go on to the next question, I just want to clarify one point, for the quarter we have processed 4.6 billion transactions.

Next question, operator.

Your next question comes from the line of Tim Willi with A.G.

Edwards.

Please proceed.

Thank you, good morning.

Question about the US debit performance, it looks like transactions per card, the year-over-year growth rate, dropped off pretty sharply, assuming a lot of that is just do to the annualization of the Washington Mutual conversion.

Within that product and maybe even on prepaid within the US, sort of what you are doing or continuing to do with the issuers to drive increased usage per card account, whether that be at the institution -- the financial institution, but anything you are also doing with merchants who again drive acceptance and usage within that particular product basket.

Debit is obviously an area of focus for us, and we were delighted to get that dig debit conversion last year.

You are seeing some discontinuity in the growth rates because we are lapping the anniversary of that card conversion.

We think there are a lot of capabilities in debit -- we were delighted that Judge Jones overturned the settlement service fee that Visa had imposed on its issuers with respect to switching to MasterCard, and we are actively pursuing those customers today.

That's one of the things we're doing to win more debit work.

Obviously at the card holder level we're working with our financial institution customers to make sure the debit is a viable product for both the issuer and the cardholder, looking in to PayPass opportunities as a convenience device to expand debit uses.

Now you are going to see transaction sizes come down with PayPass, so there will be some downward pressure on that, but we're, still very well positioned in debit and continue to see good growth potential.

Great.

Thank you.

Your next question comes from the line of Tien-Tsin Huang with J.P.

Morgan, please proceed.

Hi, good morning.

Good morning, Tien-Tsin, how are you?

Good.

Good.

Couple of questions, I first on G&A, appreciate the guidance sounds like it is going to grow at a similar rate to the first half.

Just to be clear, because your second half last year if I recall included some unusual items.

Should we adjust the base for those items as we think about growing G&A?

G&A base in the second half of the year --

Last year, yes, included some unusual items, severance and some other items, so should we adjust that base?

Anything we didn't call out as a special item in our non-GAAP consolation reconciliation contingent, I would not pull out

Okay.

Would not pull out.

Okay.

Understood.

Secondarily, on added marketing, given the loss of the World Cup sponsorship, do you expect to replace this marketing spend, or is this a chance to moderate your overall marketing spend overall?

As we said in the past we built our ad and marketing budget around the World Cup as a platform.

We didn't increase the spend, in past World Cup years because the event was taking place.

But we built it around a platform.

So we integrated spend onto that sponsorship property.

Going forward, we intend to leverage other sponsorship properties that we have, or perhaps new sponsorship properties to replace the World Cup property.

We're not sitting here internally saying we just saved X-number of dollars in advertising money.

Our customers expect us to support the brand, around the world.

We have other major sponsorship properties, whether it be UEFA Champions League, or Copa, Major League Baseball here in the US, we have got lots of leverage we can pull.

We're not sitting here turning back the ad and marketing initiatives because of the World Cup.

That's helpful.

If I can sneak in one more, just the transaction growth, still seeing some nice growth there.

How much of this is from, as you talked about, average ticket moving down versus actually potentially gaining share overseas in terms of processing?

Thank you.

Well, you know, ticket sizes -- there's a downdraft in ticket sizes particularly in the US where there is a growth in debit, which tend to be used for smaller ticket items.

I think if you look across the globe, ticket sizes are fairly stable.

I don't think we ever publish those numbers, but they are fairly stable.

So -- sort of lost my train of thought on your question there.

You were talking about ticket size --

Ticket size versus gaining profitable share...

Bob had mentioned, I have mentioned in the past we're focused on share for share's sake, we're focused on profitable share.

I know we are winning a lot of deals.

As you heard at our investor day, I know we are winning a lot of deals in Europe and other parts of the world, so the global strength is there.

And we're not sitting around here watching every needle on the Nilson scale.

We want to make sure we drive the business in a profitable way and make sure, we deliver the financial results like we delivered this quarter.

Great.

Your next question comes from the line of Adam Frisch with UBS, please proceed.

Thanks, good morning.

During the quarter there were headlines with regard to European banks regarding their own SEPA compliant debit scheme and (inaudible) September launch date, this would prove to more style than substance, but wanted to get your thoughts and also an update on how your discussions are going with European banks.

Yes, there were headlines around that developing a European payment scheme.

Adam, I think our Maestro brand and our platform in Europe is really ideal for solving the SEPA challenges.

We have about 300 million Maestro cards in circulation in Europe today; we've got pan-European acceptance, we've got international acceptance, we have unsurpassed acceptance locations in that part of the world.

Now, if selected banks decide to get together and create something from ground zero, there are obviously challenges with that.

It is very difficult to convince an issuer to issue cards to their valued customers and disrupt their relationships with customers for cards that there may not be any acceptance for.

And it's also difficult to get merchants to accept a card when there's no guarantee there is going to be issuance of the card.

It's the old chicken and the egg, and we have a platform on the ground today.

It's not vapor tag.

It works.

It's on a lot of cards already, and we think we're well positioned with that product platform to go forward.

As you heard Javier Perez, our European President talk at the Investor Day, you know the thinking is not going to be a linear progression here: you have got a lot of different constituencies, issuers, acquirers, merchants, all starting from different spots in different geographies.

There is the natural issue of sovereignty that play out in Europe; it's going to be start and stop.

But I think at the end of the day we're going to be very successful here.

Thanks for that color, Chris.

The two housekeeping items, first thanks for breaking out the cross-border transaction growth.

What was it in the first quarter?

And how is it tracking in June and July?

And other housekeeping, were there any major pricing changes which impacted revenue growth in the quarter?

Yes, Tara is looking up the growth for me right now in Q1.

We did have a bit of a slight pricing modification around our stand-in fees that I mentioned on one of the slides.

It was not significant to revenue growth in the quarter.

I did want to call that out just as we had mentioned in the past, there are targeted areas where we can increase pricing going forward, and we're always vigilant around that so we're not taking our eye off the ball from a pricing standpoint.

Not to the extent that we had with currency conversion last year.

Tara, do you have --

18.3% growth in the first quarter for cross-border transactions.

And then how it is tracking in June and July?

We can't comment on July, Adam as you know.

Okay.

Thank you.

Your next question comes from the line of Ken Posner with Morgan Stanley.

Please proceed.

Good morning.

The revenue growth in the quarter was a lot stronger than we would ever have modeled.

So congratulations on that.

I wanted to zero in on the US, where the build business growth was 10% lagging the rest of the world.

And the 10% growth was a down shift from 16% growth in the prior quarter year-over-year.

I was just curious -- should we draw the link from maybe a little bit of trimming in the advertising and marketing to a little bit of slow down in the US, which would seem to be a very rational move, or is there another explanation --

What you are seeing in the US is the lapping of the anniversary on the debit conversion that took place in 2006, so that is the key driver.

I think if you look at the debit volume statistics on the table, you'll see the US volume dropping off significantly from a growth perspective, so it's not related to any sort of conscious effort to trim back advertising marketing in the US.

The US as you know is a more mature plastic market than the rest of the world.

Starting from a point where it's not growing as quickly, and we see that with our customers in the US.

They are challenged to grow their outstandings and transaction volumes, and that obviously runs through to us.

It's a slower growth market and then you layer in the effect of the debit conversion, and you will see for the first time in a little bit, the growth rate under 10%.

Can I just ask as a follow-up -- the revenue growth rate was very, very strong.

The expense growth rate, as you pointed out, was also in the upper double-digit range.

Now I think of MasterCard as having a lot of fixed cost to the business model, are we just in a period of time when there's going to be a need to spend more to grow more?

Just to clarify, the G&A growth was -- in the quarter was 18.2%, the ad and marketing was actually down 12.6%.

So overall it was in the 3% -- 3% overall -- growth rate.

I mean just with regard to the G&A.

G&A, yes.

One of the things that I look at -- I'm going to step back for a minute and it's -- it's not appropriate to extrapolate what I'm going to say to the remainder of the year, but if you look at our six-month results we have grown our revenue just north of 20%, we have grown our expenses just north of 5%.

That's leverage, and there aren't a lot of companies throughout that can demonstrate those kinds of results.

As you all know, the fourth quarter is our period of lowest profitability, but we're not taking our eye off of the ball from an expense standpoint.

We're building out account teams, we're adding capabilities around product, we're adding abilities around advisory capabilities, and adding people, and we are going to see that growth that we have experienced in the first half of the year continue through the second half.

So people are important; we have said people are important to our business.

We think it differentiates us.

I'm hearing anecdotes where customers are very excited about our advisory capabilities.

We're winning deals not just because we walk in with a price list and we happen to be the lowest, but because we really know their business and are focused on, with people who really know, you know, the cards industry.

So we are in a period of build, that will continue through the rest of the year.

Thank you.

Sure.

Your next question comes from the line of David Hochstim with Bear Stearns, please proceed.

Yes, hi.

Sort of following up on Ken's question.

Maybe another way to think of it is -- should we continue to see, you know, $25 million, $30 million sequential increase in G&A beyond this year or are you in a building process that kind of runs through the end of this year and then we should see more modest G&A growth?

I think we clearly see -- as I mentioned in my -- prepared remarks, we're going to continue to see the growth in the second half of the year, near where we saw in the first, so you can do the math in terms of sequential increases in G&A.

You will start to see some moderation of G&A in 2008, just as we lap, we start to reach anniversaries of some of the hires we have made.

We're going to be going through a budget process with our business teams in the next several months, and we're going to be evaluating whether some of the expectations we have around continuing the pace of hire is necessary in 2008.

At this time, I think it's too early to tell where that is going to head, but obviously, something that I'm very focused on as the CFO is to make sure we don't get ahead of ourselves with that.

Is there any way to quantify the breakdown in the increase in dollar spend between personnel additions and the consulting and strategic initiatives?

That is broken out -- I mean, you'll see when we file the Q later on today, we break down personnel, professional fees, we break down travel and entertainment, etc.

the biggest bulk of the growth in G&A is on the personnel line.

Okay --

We're a growing company.

Right.

And we need resources, so it's a -- not necessarily evil thing to be in a position where you can add people and show the kind of leverage we have shown through the first six months of this year.

Right.

Could you just maybe give us an update on your view of the general downdraft in the average revenue margin on the 18 basis points, I mean the downdraft this quarter as you pointed out was positive.

It's updraft.

Negative downdraft, okay.

Negative downdraft.

Some of that is moderated by international volumes.

Tara gave you the growth in the international volumes over time.

And when that volume is strong as I have said in the past, we are able to generate basically a higher margin on those -- higher yield on those types of transactions.

We're processing the transaction because it's across the border.

We are generating currency conversion fees to make it -- to get the currency back to the home country of the card holder, whether or not we actually convert it, at the point of sale we're able to make sure that happens.

Generally when people travel they are putting big ticket items on their cards, they are putting their plane tickets, hotel stays and hopefully nice meals with their families, as they travel around the world or go on business.

So when that revenue growth is up, it provides buoyancy to the effective yield, and as I said over a long-term horizon we expect gentle downdraft on that, but as I cautioned Liz earlier on, quarter-to-quarter it might bounce around a little bit.

Was the stand-in price change at the end of the price change, or during?

It was toward the tail end, mid-to tail end of the quarter.

Next quarter we might actually see some effect you would point to?

I'm sorry?

That will roll in to the next quarter.

Right.

Okay.

Thank you.

Your next question comes from the line of Michael Cowen with SuNOVA Capital, please proceed.

Hi.

Thanks for taking my question.

You mentioned something about front loading some of your assessment rebates.

Could you clarify that, I wasn't entirely clear as to what that meant.

Yes, what we were trying to point out there is last year in the second quarter, we had a lot of card conversion costs related to that debit issuer conversion we chatted about, and we wanted to sort of amplify the fact that despite the fact we didn't have that same experience this year, we have a lot of merchant programs in place where the performance of the merchant relative to MasterCard specific criteria, issuance or volume of sales they do on MasterCard cards or new acceptance categories, for instance, warehouse clubs, et cetera, those kicked in earlier in the year.

So if you were modeling and were expecting a large decrease in your rebates and incentives on the assessment line, you might not have seen it this quarter.

We wanted to just provide some color around that.

I'm sorry, so just to clarify, so does that mean that it kicks in -- it's kicked in early in the year, so therefore, you know, rather than be recognized ratably through the year, it's more front end loaded than back end loaded or it just started earlier?

It started earlier.

Okay.

Great.

Thank you.

Your next question comes from the line of Andrew Jeffrey with Robinson Humphrey.

Please proceed.

Hi, good morning.

Chris, could you talk a little bit about market share, especially in Europe, or any comments in the US, and whether or not you see yourself continuing to take share and whether there are any portfolio conversions in the pipeline that we should expect to hit in the next several quarters?

Well, I think if you listen to Bob and I over the past year or so, we are not focused on share.

We do not sit around the senior management table pouring over the Nilson reports and, you know, looking for share swings in different geographies and different products et cetera.

We're focused on profitable share and delivering financial results like we delivered this quarter.

We're constantly looking for new deals.

The deal flow is very healthy right now.

We're seeing a lot of deals coming through Europe, a lot of them come across my desk.

Javier Perez and his team are quite energetic and quite optimistic about what they are seeing in Europe.

We're well-positioned, we're on the ground, we've got great products.

You're going to have ups and downs and swings around round abouts in share in geography to the next from quarter to quarter.

But again we're focused on driving the bottom line and making sure we maximize the value to the shareholders.

Okay.

Are there any portfolio conversions currently n the pipeline?

There are always deals going on.

I mean, that's what our sales force is out doing, whether it is a segment deal or a brand flip, but I can't comment on specific transaction that are underway right now obviously for confidentiality reasons.

Thanks a lot.

And your next question comes from the line of Chris Brendler we are Stifel Nicolaus, please proceed.

Hi.

Thanks, good morning.

(inaudible), but just to follow up a little bit on the rebates and incentives.

I know you don'thave a manager of those arrangements, but consistently in your Qs and Ks and regulatory filings, you state that your revenue is moderated by demand by our customers for greater rebates and incentives, and my understanding that's a key part of your value proposition to the merchants.

So -- and we definitely have seen a deceleration relative to the prior two years in the first two quarters of the year.

Can you just maybe give us a little more color on is that a deceleration?

Is it more of seasonal impact?

I'm backing out the (inaudible)-- I know it's not WaMu - (is there) any more color you could give on sort of the pricing dynamics and your relationships with your customers.

Yes, I think we have said in the past that our customers are very tough when they sit across the table from us, and they are under pressure.

First of all, they are dealing with an inverted yield curve and now subprime issues and they are trying to squeeze every penny they can out of every supplier and business adviser that they deal with.

So you are going to have quarter-to-quarter acceleration or deceleration, one of -- I think the natural things you see in the rebates and incentives is the growth of the base, when you are starting from zero, and all of a sudden you providing rebates and incentives to a merchant category that you didn't provide before, you are going to see a very high growth in rebates and incentives.

As that comes up over time and stabilizes, you are going to see the deceleration occurring.

You also see some (inaudible) around seasonality of the business, we tend to have more rebates and incentives with merchants in the back half of the year as we promote around the holiday season.

So I think a good part of it is a base, a good part is seasonality, but we don't expect, you know, the net revenue yield on GDV to be spiraling upward.

Okay.

Again, downdraft.

Separate question real quick, just give me -- I know you said you were going to give an update on the buyback on the third quarter call.

Any other time line for your excess capital position?

Is there anything else you anticipate this year in a dividend or buyback?

That's because it looks like the excess capital continues to build very nicely.

It does.

You are absolutely right, and it's something we think about all the time.

The FIFA settlement put some additional cash on our balance sheet.

If and when we decide to do something with RedeCard that may provide additional liquidity as well.

We haven't decided quite yet what we're going to do with those securities.

I think we demonstrated very early in our evolution as a public company, sometimes we forget we have only been public for a little over a year, we have already announced a dividend increase and a $500 million share repurchase.

I think that's pretty remarkable.

As we get further out in the year and get the third quarter under our belts, we're going to be constantly updating the board in terms of different opportunities we have for the capital structure.

Lot of flexibility there.

We can increase the dividend.

We can do another share repurchase if we need to.

And obviously we're always looking to acquisitions that make sense to us.

Nothing specific I can point to today, but I just want to assure you nobody has missed what you have observed which is we have got a lot of capital.

Nice problem to have.

Thank you.

Thank you.

Your question comes from Robert Dodd with Morgan Keegan.

Please proceed.

Hi, guys, just going back to the World Cup, and what you're going to do on the sponsorship side there.

It was a pretty significant property where you had a lot of relationships who were, you know, co-branding cards for points to go to the World Cup in Germany or whatever --

Correct.

-- what has been the reaction from the customers there who had those co-branded MasterCards?

Are you getting any kind of blowback from them in terms of potentially losing share to Visa, given that the sponsorship is shifting?

We haven't gotten blowback.

It obviously was a nice property for us and we were involved with it for a long period of time.

And you said something about relationships on there that I think our customers understand.

If you have a partnership with somebody that involves the kind of money that we spent with FIFA around the World Cup, you have to trust your business partner; and at the end of the day, we couldn't get there.

I think our customers understand that.

I don't think they're going to penalize us from walking away from a situation that didn't meet our standards.

We're very good with working with other sponsorship assets and properties.

In the US, to be candid, FIFA is not that big of a deal.

I think people are just not that close to soccer events, et cetera.

In other parts of the world it is a bigger deal, but we do have other properties.

The Champions League in Europe draws as much attention and fever as the World Cup.

And COPA, if you followed the Argentina - Brazil game, gets as much fever as the World Cup event.

So we haven't gotten any backlash yet.

It's still early.

There could be some.

I'm not going to pretend that's not a possibility.

But so far so good.

Okay.

Thank you.

Sure.

Your next question comes from the line of Mark Sproule with Thomas Weisel Partners please proceed.

Thanks.

Just really quickly, I guess, to cycle back a little bit on the US GDV growth.

Are you seeing any, I guess, shift within the consumer base from a merchant perspective pushing toward the PIN debit volume --

Mark, can you speak up or get closer to the phone.

We can barely hear your question.

Sorry, I apologize.

Can you hear me a little better now?

Yes.

On the US GDV side, understanding that a little bit is a rollover of the WaMu stuff but when you look at the debit volumes there, are you seeing any -- is it a confluence of maybe U.S.

consumers spending less or a push out from merchants trying to drive consumers to PIN debit?

Is there any sort of offset that you can push in there to drive growth upwards?

Obviously merchants encourage PIN debit at the point of sale.

They try to prompt for PIN debit because they can run them on the (ACH) network or one of the regional ATM networks: that's better economics for them.

But our issuers don't necessarily get the same economics from a PIN debit deal as they do from a signature debit or a credit transaction.

So whatever pressure the merchant is putting on, the issuer is putting on similar pressure to either sign or use a credit card.

So you can't find too many PIN debit products these days that offer rewards, which is a major proposition when it comes to card holder pulling out their card at a point of sale.

So I don't think we are necessarily seeing the movement in the GDV in the US now slightly below 10% as attributable to a -- you know, a sea of change with respect to how people are using cards at the point of sale.

There's pressure from the merchant that I think is being counteracted by pressure by the issuer -- what I think you are seeing in the US the fact that it is a fairly mature credit market.

And 9.8% growth isn't bad in most parts of the world.

But we're fortunate enough to be a global company, so we're seeing mid-teens in the international geographies.

The subprime issue, I'm surprised nobody has raised that yet.

We're not seeing that on a day-to-day basis, which would indicate that something calamitous from a spending perspective is going on out there.

I think in the past we have weathered, whether it be recessions, you know, a SARs event 9/11, fairly well.

I think there's even some data out there that suggests that during economic slow times, transaction and transaction volumes might actually pick up.

I think we're feeling pretty good about the US overall, but we do have to moderate expectations given the market dynamics.

Okay, if I could shift gears a little bit back towards the marketing discussion.

Is there -- you know, some of your commentary obviously -- Champions League may not apply to this, but are you looking at more maybe smaller localized events like the COPA, like the Brazil-Argentina event versus the global Olympics, World Cup type events that you have sort of been pushed out of for the short-term?

Thanks.

There are two large global properties from a sponsorship standpoint that have marquee value.

The World Cup is one, the Olympics is the other.

We think we're able to do things at a much more tailored-basis level with local levels with local sponsorship perhaps more customer-specific advertising.

So we've got a lot of buttons to push.

Larry Flanagan, our Chief Marketing Officer, and his team never have a shortage of ideas on how we can continue to support the brand around the world.

This was -- you know, it was a major sponsorship.

It's unfortunate we weren't able to get FIFA to play by our standards, but I think we're going to be able to continue to support the brand and the recognition it's gotten and the strength that we have enjoyed over the past 10 years or so.

Thanks a lot.

Sure.

And your next question comes from the line of Christopher Mammone with Deutsche Bank.

Please proceed.

Most of my questions have been answered.

Just quickly on the tax rate.

Came in a little lower than we expected.

What is your outlook for the full-year tax rate?

We don't give outlooks, but what we are using internally is 36%.

We did get a little bit of a benefit this quarter.

New York State changed their tax rate, dropped it, which is unusual for New York State to drop anything from a tax standpoint, but we'll take it.

It was mitigated by the fact that under the accounting rules, when your tax rate comes down, the deferred tax assets you have on the balance sheet they have got to be written up, a little counterintuitive, so that did moderate it.

But I think if you are modelling, 36% is a good number.

Great.

Thanks.

Sure.

Your next question comes from the line of Dan Perlin with Wachovia.

Please proceed.

Thanks, hey, just a couple of quick questions.

Third quarter A&M you said was going to increase.

I just wanted to make sure you are talking about absolute dollar increase sequentially.

Absolute dollar increase sequentially, yes.

Secondly, US dollar, or just the total revenue growth -- when I try to reconcile that and I take out the currency, is it safe to say that the kind of remaining delta is just mix into the international market as opposed to maybe better pricing or the standard-in routing option.

You'll see it in the filing this afternoon too if you turn to the section on revenue growth, there's a description of the impact of stand-in fee change, and the impact on that revenue line, but relative to the total revenue growth, it's insignificant.

Okay.

So then it's primarily mix shift into the --

It's volume, international volume and -- like you said the mix.

Have you ever talked about what the just basis point differential is in general from international versus domestic.

We never disclose that, but I can give you some thought around that.

We process transactions in pretty much the Anglo American countries, the US, UK, Canada, and Australia.

Obviously we generate more revenue than if we simply assess based upon the volume.

The basis points for a domestic transaction, US transaction or in one of those countries is going to be higher in a country -- pick a country, France, Germany, et cetera, where we don't process we simply assess on the card volume for a domestic transaction.

So you can assume that international volume, cross-border volume, and volume in countries where we process domestically is going to be higher than otherwise.

Okay.

And are there other pricing opportunities aside from cross-border be it card type?

You know, there was a lot of discussion about debit and debit this quarter on the call, but it seemed to me the PayPass is an area where you make more than a PIN debit transaction is that fair to say?

PayPass is a -- it's treated as a signature-based transaction, even though, but the signature is waved under $25.

Right.

We would generate more on that transaction than a PIN debit transaction, that's correct.

As that becomes a larger percentage of your volume, that's kind of a weighted average increase.

That would help us out.

We love PayPass.

I think the banks do too.

All right, thanks.

Your next question comes from the line of David Parker with Merrill Lynch.

Please proceed.

Good morning, Chris.

Morning.

Could you just provide us an update on your efforts to increase your acceptance in to new categories like healthcare or bill payment?

Sure.

I think there was some time spent around new acceptance categories, and -- and opportunities at the Investor Day.

I am not the one to talk about some of the technical implications of for instance, mobile payment systems the telephony-based area, but we do spend a lot of time on that.

We do have some initiatives in healthcare going on in Wendy Murdock, our Chief Product Officer's organization.

We have been successful in the past of opening up new acceptance categories at the merchant location.

We announced the Sam's Club deal last fall which is the first time ever that general purpose cards were accepted at their warehouse location.

You know, personally, as I travel around the United States and overseas, I see more and more places where I use my card that I couldn't in the past.

Fast-food restaurants is another great example of how we've opened an acceptance category.

Lots of things going on within the company, always thinking of ways to make it easier for people to pull out plastic and use it instead of currency.

So obviously healthcare is a big area.

We, you know, look at the government sector as well.

We look at telephony.

PayPass, other remote forms of information flows, et cetera, RFID devices, so a lot's going on.

Okay, great.

On a different subject, the House Judiciary Committee a hearing regarding interchange fees -- was there anything surprising that came out of some of the comments at that hearing?

Or any thoughts on interchange fees in general that you could share with us?

Nothing was really surprising, make sure that the lawmakers understand what interchange is all about.

And I think to some extent interchange has been characterized as a nasty thing, an indirect tax on consumers and putting small merchants out of business, but our position has always been it is necessary to make the card system work.

It's the balancing mechanism.

Issuers are not going to issue cards if they have to eat the cost of float, of fraud, of processing, et cetera, and if you don't have people issuing cards, then the merchants aren't going to be able to have people walk up to their registers and pull out their cards, which has been shown to increase traffic, increase ticket sizes, et cetera.

So we spent a lot of time with the Congress folks that are and the other Legislators involved and (with the) regulators around the world in educating them about what interchange is.

You know, a great example of how, you know, you can get knee jerk reaction to enter change is in Australia, where the regulators arbitrarily cut interchange in half; and what happened was rewards were cut back, fees were tacked on to the consumer.

Somebody's got to balance the economics.

Interchange is the balancing mechanism.

If you have regulators just walk in and arbitrarily reduce interchange, it falls out someplace.

It's like squeezing one end of a balloon, it's got to come out the other side.

Kind of like price controls under the Nixon administration, it just doesn't work at the end of the day.

Great.

Thanks, Chris.

Okay.

Operator, I think we have time for one more question.

Okay.

And your final question comes from the line of Pat Burton with CITI.

Please proceed.

Hi.

Thanks for taking my call.

Chris, could you give us an update on the share conversion program, if there is one to be given in terms of the bank's interest?

And how the mechanism will work?

Thanks.

We actually sent some information I think publicly on how that works.

There's 13.4 million shares that will be eligible for conversion.

The conversion will run from August 2nd through October -- August 4th, excuse me -- to October 5th, and simultaneous with that we'll be executing the $500 million share purchase to take some of the supply pressure out of the system.

We will be providing an update on how that conversion is going in the third quarter earnings call.

I can't comment on activity within the B shares themselves, because that market is not public at this point in time.

Anything going on today between shareholders buying and selling I can't really comment on, Pat.

But we're optimistic that a number of banks will take advantage of the opportunity to convert, and we stand ready.

All of the infrastructure is in place to make that happen, shareholder services have been involved, and we have got a broker and everything, so it's all set and ready to go.

It's on the runway.

I don't know if you can comment, but would you expect the full 13.4 million shares to be subscribed?

No, I can't tell, Pat.

I'm hopeful it will.

One of the things, the way we structured this in terms of the mechanics, what we're hopeful is that a lot of the smaller shareholders located in remote parts of the world that are licensed members and do hold shares will use this to sort of -- almost as a cleanup provision.

If that have a small number of balances, this conversion is probably weighted a little bit to letting them exit and later conversions will be a little bit more accommodating to the bigger banks to move bigger positions.

We incur a lot of costs internally to, you know, send out notices, to communicate with these shareholders, and some of them hold really de minimus levels of our shares, so they might want to take this as a chance to clean that up and get some of our cost base down.

Thank you.

Sure.

Okay.

With that, I think we're going to wrap up.

Barbara?

Thanks for all listening in and joining in this morning.

We're really optimistic about the rest of the year.

Things seem be going very well; and the management team obviously is very focused on continuing the momentum and to deliver the kind of financial results that we delivered this quarter.

So, again, thank you.

And we'll sign off.

This concludes the presentation.

You may all now disconnect, good day.