萬事達 (MA) 2008 Q2 法說會逐字稿

Thank you, and good morning to everyone.

Welcome to the Mastercard second quarter earnings conference call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you, and good morning to everyone.

Thank you for joining us today, either by phone or webcast for discussion about our second quarter 2008 financial results.

With me on the call this morning are Martina Hund-Mejean, our Chief Financial Officer and Tara Magguire, our Corporate Controller.

Following comments by Martina highlighting some key points about the quarter, we will open up the call for your questions.

In total the call will last up to one hour.

This mornings earnings release and the slide deck that will be referenced on this call can be found in the investor relations of our website MasterCard.com.

The earnings release and slide deck have also been attached to an 8K that we filed with the SEC there this morning.

A replay of there call will be posted on our website until August 7th.

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

Any 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 contain in our recent SEC filings and with that, I will now turn the call over to Martina Hund-Mejean.

Thanks, Barbara and good morning, everyone.

We are pleased with our overall second quarter results.

While we remain mindful of the current economic environment, our business fundamentals continue to provide a solid foundation for us to meet our business objectives for 2008.

Turning to page two of the slide deck, in the second quarter we delivered net income of $276 million or $2.11 per diluted share, excluding a special item related to the settlement of our antitrust litigation with American Express.

Under the terms of the settlement, we will pay American Express up to a total of $1.8 billion.

We recorded in the quarter the pre-tax net present value of this liability of $1.65 billion.

On an after tax basis the charge was just over $1 billion.

While our results have been impacted by the settlement, we are pleased to have brought this issue to closure.

Including the special item, we recorded a net loss of $747 million or a loss of $5.74 per diluted share.

Net revenue totaled $1.2 billion, up 25% over the comparable period last year.

This was driven primarily by strong growth in Worldwide GDV and process transactions, as well as cross border volumes which grew 18.9%.

Additionally, pricing changes contributed approximately 5 percentage points of the revenue growth in the quarter.

Currency fluctuations also represented 5.4 percentage points of this growth.

Finally, demonstrating the continued leverage built of our business model, we saw our operating margin improve 6.1 percentage points to 33.4% from 27.3% in the second quarter of 2007, excluding special items.

Before getting into the detailed financial results, let me just step back a minute and talk about what we are seeing across our business, and the economic environment both here in the United States and abroad.

Please turn to page three.

The slow down in the US economy has had an affect on our growth in the United States.

Over the last few quarters, we have seen a steady decrease in US GDV growth from 10.6% in Q4 of 2007 to 8.9% in Q1 of 2008 and now the GDV growth for the second quarter was 6.2%.

During the second quarter credit volume growth was only 0.7%, but debit grew at 15.8%.

US purchase volume was slightly higher than GDV growth while cash volume growth was down.

Process transaction growth is still ahead of volume growth at 7.8%.

As I shared with you in our last earnings call and at our annual investor meeting, in the US, we are still seeing consumer spending patterns shifting to more nondiscretionary purchases.

Our process transaction data, as well as MasterCard Advisors SpendingPulse analysis, continues to show an increase in sales of necessary goods, such as gasoline, food and healthcare, largely due to increasing prices.

The impact of higher inflation and lower housing prices are compounded by the fact that consumers are finding it increasingly difficult to obtain credit at as financial institutions tighten their criteria for loans and credit extensions.

However, we continue to see double digit growth in markets outside the US, which contribute a little more than half of our reference news in the quarter.

Whether economic down turns in the UK, Spain and a few other European countries, in general, European markets continue to represent strong growth for us.

Furthermore, we still see healthy cross border volume growth, while down slightly from the 20% plus growth levels we have seen over the past two quarters the second quarter growth rate of 18.9% is higher compared with the same quarter last year.

As in recent quarters, this growth continues to be primarily driven by Europeans traveling in Europe and overseas and we have not seen any significant change in travel patterns on a year over year basis for any of the regions.

Last, as we have discussed before, much of our growth is being driven by the shift of electronic payments, which we believe is some what independent of the cyclicality of current market conditions.

We continue to collaborate with our customers to maximize the value of the payment businesses, recognizing the extraordinarily challenging conditions in the current economic environment.

We are partnering with them as they refocus their efforts from account acquisition and marketing toward the maintenance of their existing business and areas such as fraud loss prevention.

We are not insulated from the pain that our customers are feeling, and we are actively working our expense structure to deal with the changing demands of our customers.

In a few minutes, I'll reference a couple of examples of actions that we have undertaken.

Switching now to some business highlights.

On our last call, we discussed our announcement of our debit processing platform Integrated Processing Solutions or IPS.

I'm very pleased to report that we are now in live production with our first customer, Security Service Federal Credit Union, having successfully completed the critical first stage of a multi-stage implementation program.

With respect to our US litigation, I have mentioned that we have entered into a settlement agreement with American Express in June.

We will pay AmEx up to $150 million for 12 quarters beginning this September and the payments will not exceed a total of $1.8 billion.

There are two recent developments related to the Discover case.

First we entered into a judgment sharing agreement with Visa that apportions cost and liabilities both companies may incur in the event of either an adverse judgment or settlement of the case.

This agreement provides that Visa would be responsible for the substantial majority of any judgment or settlement based primarily on relevant volumes.

Second, the District Court recently indicated that it expects to issue positions and summary judgment motions no later than August 18, and has rescheduled the trial to begin on October 14, 2008.

In mid June, we announced that we would comply with the European commissions ruling by temporarily repelling our default intra-EEA cross border consumer card interchange fees, effective June 21, 2008.

We continue to hold discussions with the commission to see what interchange fee setting methodology we might employ in order to be compliant with the decision.

In any event, we will take appropriate action to ensure that we remain competitive in Europe.

With respect to our repurchase program, during the second quarter we purchased approximately 1.3 million shares of Class A common stock for a total of $355 million.

We have now completed the approved $1.25 billion repurchase program.

We regularly review our capital structure with the Board, and will continue to evaluate additional share repurchase programs in the future.

Further, this past February, our Board authorized the conversion of up to 13.1 million shares of Class B stock into Class A stock during 2008.

In the second quarter we implemented and completed a conversion program with all of the 2008 authorized shares of Class B common stock converted into an equal number of Class A common stock which was then subsequently sold or transferred to public investors.

Class A shares now represent approximately 76% of total shares outstanding.

Let's turn to page four of the slide deck.

Net revenue for the quarter exceeded $1.2 billion, an increase of 25% versus the year ago quarter.

Currency fluctuations of the Euro and the Brazilian Real relative to the US dollar contributed 5.4 percentage points of the net revenue increase, resulting in underlying business growth of 19.6%.

Approximately 5 percentage points of this was due to pricing changes.

Excluding the special items related to the litigation settlement, our operating income of $416 million resulted in an operating margin of 33.4% for the quarter, a 6.1 percentage point improvement over the second quarter last year.

As we have mentioned in the past, our strong revenue growth enabled us to leverage our operating margin.

The contribution from foreign exchange was less than 1 percentage point of this increase.

Net income was $276 million or $2.11 per diluted share excluding the special item.

Turning to page five, growth dollar volume grew 12.8% on a local currency basis in the second quarter and 18.2% on a US dollar conversion basis to $655 billion.

This quarter was the 17th consecutive quarter of double digit worldwide GDV growth on a local currency basis.

Growth in the US was 6.2% and purchase volume growth in the US was higher at 8.0% versus the second quarter in 2007.

Although not shown on page 5, on a local currency basis, worldwide purchase volume was up 14.0%, and cash volume growth of 9.3% was slightly lower than the comparative quarter last year.

Additionally, cross border volume or the volume that is generated from card holders who travel outside of the country, where the card is issued was up 18.9% over the comparable quarter last year.

I'd like to point out that beginning in the second quarter, we refined our methodology for calculating our cross border volume to use the merchant country rather than the acquirer country.

The effect of this change only relates to volume growth rates, which is very small, and has no impact on our reported revenue.

Prior reporting periods have been restated and can be found within the supplemental operational performance data on our investor relations website.

Process transactions or transactions processed across MasterCard's network increased 13.6% to $5.2 billion in the second quarter.

We continue to benefit from the global diversification of our business with our ability to generate significant volume, transactions and revenue from economies outside of the US.

Net revenue yield was 19 basis points in the quarter, versus 18 basis points in the second quarter of 2007.

Pricing changes were the primary driver of this improvement.

Let's turn to page six.

You can see the net operations fee increase 28.7% or $209 million to $938 million in the second quarter.

Growth operation fees increased 27.5% or $222 million to a little more than $1 billion.

This growth was driven by several factors.

First, growth in process transactions, cross border volumes and dollar volumes that are previously described on page five.

Second, new pricing changes implemented in January of this year on cross border acquiring volumes and on retail purchases in the US of by non-US card holders.

And third, reach flew for other payment-related services such as new account enhancement programs launched late in the second quarter of 2007 and global cardholder services.

In the second quarter, net operation fees as a percentage of growth operation fees improved slightly, due to a continuation of lower rebate customers whether or not did not achieve contractual performance criteria.

On page seven, we show that net assessments increase 14.9% or $40 million versus the second quarter of 2007.

Gross assessments increased 15.9% versus US dollar GDV growth of 18.2% or $80 million to $583 million due to strong GDV growth, slightly offset by mix.

Net assessments as percentage of growth assessments declined somewhat, compared to the second quarter of 2007.

Please turn to page eight for some detail and expenses.

During the second quarter, excluding the special item, total operating expenses increased 14.6%, of which 4.5 percentage points were related to currency fluctuations.

The increase was mainly driven by two factors.

First, a 15.7% increase in general administration expenses, of which 3.3 percentage points were related to currency fluctuation.

The growth in G&A was driven by higher personnel costs excluding the impact of effects could now cost 18.1% primarily driven by the hiring of new personnel, as well as higher severance costs as we continue to align our business needs against our existing talent pool.

Second, we recorded a 13.0% increase in advertising and marketing expense, currency fluctuations represented 6.6 percentage points of this increase.

This growth was primarily due to the timing of expenses, mostly sponsorship activities related to the UEFA and European championship soccer events, as well as ongoing investments in high growth markets.

Moving to the cash flow statement and balance sheet highlights on page nine, we generated $319 million dollars in cash flow from operations during the quarter.

We ended the quarter with $2.7 billion with cash, cash equivalent and available for securities.

This includes the repayment of $80 million of subordinated debt.

Available for sale securities decreased $84 million in the quarter, mostly due to the sale of short-term bond funds.

The American Express litigation settlement had an impact on primarily two areas of our balance sheet.

First litigation liability increased by $1.65 billion.

Second our deferred income tax assets increased by $530 million.

Both of these totals were broken down into their short and long-term components and booked to the balance sheet.

In April of this year we formally integrated the operating structures of our operations in France with Europay France forming a new entity, MasterCard France.

This resulted in a 70% equity interest for MasterCard.

We accounted for the transaction as 100% acquisition and recorded for the liability of the present value on for the fixed purchase price of 15 million Euros which will be paid by MasterCard in three years.

At that point in time, we will own 100% of the entity.

As of quarter end, we have finalized the repurchase of approximately 1.3 million Class A shares in the open market for $355 million.

Before moving to the Q & A, I would like to spend a few minutes on slide ten, highlighting a couple of items for your consideration as you refine and update your models for the remainder of 2008.

In light of what we currently see for our business, the longer-term performance objectives that we talked about on May 29th remain unchanged; however, we have refined our outlook for full-year 2008:

We continue to expect slower net revenue growth than the 22.3% growth we experienced in 2007, but still at double-digit rates, and assuming constant FX.

Year-to-date our revenue growth rate has been 21.8%, excluding FX.

Slower U.S.

growth could have some impact on net revenue growth for the rest of the year, likely tempered by the effect of performance criteria in our customer agreements and our continued strong growth overseas.

Our outlook for G&A expenses excluding special items remains unchanged.

We should grow at a rate that is both slower than 2008 net revenue growth, and below the 2007 G&A growth rate of 16.8%.

Similar to revenue growth, our 2008 outlook assumes constant FX.

On a year to date basis, G&A growth has been 10.3% excluding FX.

With respect to A & M, we now anticipate to spend roughly the same amount as in 2007 based on current FX rates as we adjust our efforts in line with our custom activities.

We don't anticipate as much marketing expense in the second half of this year, particularly in Q4.

Previously, we have been expecting to see a modest increase in total A & M spend for full year 2008, assuming constant FX.

These thoughts continue to assume no global recession and no event which significantly disrupts cross border travel.

Finally, while we do not plan to break out the interest accretion impact associated with the American Express settlement as a special item, we do expect it will increase interest expense by $44 million for the second half of 2008.

We have included an amortization schedule in the appendix to this presentation, which models the increased quarterly expense amount over the settlement pay out period over the next 12 quarters.

To wrap up we are very pleased with our second quarter results but are mindful of the economic conditions that we operate in.

We are managing our business plans in light of a tougher market and are taking the necessary expense management actions as we see our customers realigning their plans.

We remain committed to growing our business while managing costs and investments in order to drive shareholder value.

Barbara?

We are now ready to begin the question and answer period.

In order to get to as many people as possible, please limit yourself to one question with a follow up.

(OPERATOR INSTRUCTIONS) First question will come from the line of Tien-Tsin Huang from JP Morgan.

Please proceed.

Hi.

Thanks for all the details.

A couple of questions I guess first on US credit growth.

Last quarter he you mentioned Martina, I think a contract termination.

Did that occur?

And if so, what was the impact?

Yeah, I mean we, I think we talked about that in the last quarter already.

That was where a customer of ours sold their business to somebody else, and the impact in the quarter was actually relatively small.

Very small.

So the growth of I think you commented 0.7% growth in credit.

Is that where it would have lit?

I was curious what the growth would have been excluding that change.

I didn't say, but it would not have significantly been different.

Can you just comment on monthly trends in general on US purchase volume growth in the second quarter particularly in credit?

Yeah you know what we saw, obviously we saw you know during the quarter it came down a little bit in June.

It came down a little bit, too.

I mean it wasn't a cataclysmic decline.

What we are seeing on average here for the second quarter we are seeing as a trend also for July.

Just quickly on G&A.

Did you quantify the higher severance costs and what kind of savings you can get out of it?

We can certainly do that.

If you just look at the G&A expenses overall you saw a 15.7% increase of which 3.3 percentage points related to currency fluctuations, and in terms of the severance I can guide you that was about 3 percentage points of that.

And the savings you expect out of that going forward?

Yeah I mean you know, I think you know pretty much our run rate in terms of what we spent on average per employee.

So you know we do obviously expect some savings.

Otherwise we wouldn't have done this.

It is really a realigning our work force with the business needs we are seeing forward.

Again, as you know, we are still investing in the business.

But we are also seeking to expand our operating margin.

Got it.

Thank you.

Next question from the line of Pat Burton with Citi.

My question about is cross border travel, as you approach the year ago numbers where you had some pretty hefty growth how much do you think that 18% number will decelerate?

Are we talking 5 sequential points, something like that?

That is a very difficult question.

I mean what we have seen is that cross border growth has actually accelerated over the last year.

In particular, when you looked at the fourth quarter of last year and that had kind of continued into the first quarter of this year.

You know, I mean, we are talking relatively, still extremely healthy growth rates at almost 19%.

I, you know, we have not, I mean what I can tell you is we really have not seen any change in travel patterns.

The travel patterns are really still pretty much the same from what we saw before.

We saw the Latin Americans maybe traveling a little bit more in Latin America versus you know, coming to the United States.

We really saw no discernible difference between what the Europeans do and what people from Asia Pacific do.

So you know, we are -- we still believe that cross border volume going forward will be healthy.

But I think it would be really hard for us to guide you to any particular number for the future.

Thank you.

Next question will come from the line of Adam Frisch from UBS.

Please proceed.

Thanks.

Good morning.

Martina, as you see the top line potentially enduring some headwind, whether it be from year-over-year comp being tougher in the second half, or a slower consumer -- obviously your growth has held up really well so far.

But I think expenses are going to become a bigger part of the margin equation going forward.

Good to see A&M is staying steady year over year but what can we expect from G&A going forward?

That is really the expectation from a lot of your investors where there is higher operating margins going forward?

Yeah, Adam, we are very mindful obviously between the top line growth and what we have to do between the G and A perspective.

We pretty much reiterated our thoughts for 2008.

We are very mindful of what happens in the United States and how it could possibly impact our growth rate.

Despite that, as you know, we have some pretty good leverage leverage to moderate any kind of impact, be it what happens in terms of a tiering perspective from our customer agreement.

More than half of our revenue growth is actually generated out of the United States.

And from a G&A perspective, again we are pretty much reiterating what we had said before.

When you put the numbers together, you should see some pretty healthy margin expansion, you know.

But you already saw for the first six months as well as for the remaining six months of the year.

Okay.

We'll take that offline, but thanks for the color there.

The only other thing I wanted to ask was on the credit portfolio brought up a customer loss and said it was small.

Was there anything else going on in your credit portfolio that would explain the growth there?

No.

This is from, everything that we can really see, this is what is happening in the market in the United States.

As in my opening remarks, I told you the economic environment is pretty tough.

We obviously still see the move from nondiscretionary purchases to discretionary purchases, but we also do believe that the housing prices and the restrictions on credit for consumers have an impact on the consumers utilizing their cards.

Okay.

Last question.

On debit.

Obviously you are making a bigger push into that market.

IPS you have your first customer close to up and running.

What are your other plans for debit growth going forward?

Do you plan on doing it organically or potentially via M and A?

Thanks.

I think you know we really have all options open.

IPS is obviously a significant investment that we did over last year and in the first part of this year.

So that is our primary focus, to make sure that we get Security Service Federal Credit Union up and running and then focus on the next customers in the pipeline.

But you know, depending on what kind of things will come in the market, we, you know, we have an open mind.

Okay.

Thanks.

Next question will come from the line of Chris Mammone from Deutsche Bank.

Thanks.

Last quarter you guys talk about I think one customer falling short of volume thresholds that caused you guys holding back on rebates incentives.

I'm just wondering what kind of multiplier effect might have happened in the second quarter.

How many customers might have been affected by falling short of volume goals and I have a follow-up.

Yeah, Chris.

I mean you know, as you said in the first quarter we had actually significant impact from one particular customer.

That is really why we pointed that out.

In this quarter, there is no really particular customer, any particular customer who impacted this.

But when you can -- I mean you see how the volume growth in the United States and particular on the credit side was lower than in prior quarters and in a year ago, and that is where our customer agreements are actually working from a rebate and incentive point of view and the kind of performance hurdles our customers have to achieve in order to get into the next year.

So we have a little bit of an offsetting lever.

But there is no particular customer in this quarter that we would be pointing to.

I think it's a general part of the environment.

Okay and then any measurable lift from the government stimulus checks?

I know about $100 billion had reached consumer's hands by the end of June.

Yeah.

I mean we really looked at our data to see whether we can see any discernible difference.

Especially where we are hearing that people are spending those kind of checks.

And we really cannot find, from our network data, any appreciable difference.

Okay.

Thanks, guys.

Next question will come from the line of Liz Grausam from Goldman Sachs.

I wanted to ask a question looking at SEPA and looking into the next few years reaching some of the critical hurdles in the regulatory framework out in Europe.

How should we think about that as possibly some offset in your process transaction growth, where we could see some decoupling between your GDV and process transaction growth friends as you are gaining share in the processing landscape out there?

Yeah, Liz, that his a good question.

As we have talked about it before, SEPA is really a guideline not a law.

The banks in Europe are supposed to comply with the guideline.

I believe by the end of 2010.

However, this is a relatively slow process.

I think at our investor meeting Javier did a really nice job pointing out where we're going with SEPA and in the kind of wins that we have already had.

We are not only working with banks in the market but we are also working with merchants in the market at this point in time merchants can re-point the acquiring activity they would like to go through.

And obviously, given our network and the cost effectiveness of our network, we found ourselves to be the first choice in a number of those engagements.

These kind of things are going on, Liz.

There is nothing in particular that we want to disclose at this point in time.

But these efforts that Javier was talking about have continued in Q2 and we are believing that it will definitely continue for the rest of the year and the next couple of years.

But given it is so early in this evolution and given that you know a lot of the European banks really have to grapple with what are they going to do with their own processing facility, it is really hard for us to give you a particular guidance in terms of how this might impact our GDV or process transactions.

Great.

Then just another question on the cross border trends you are seeing.

Visa reported last night they saw a little bit of softening as well on the cross border trends but mostly pegged it on the US consumer not going overseas and that is where the cross border softness and no major change in trend in the foreign consumer traveling.

Is that similar to what you are seeing?

And have fuel prices affected the ability for Europeans yet to pursue cross border travel?

And how are you thinking about that, going forward?

Yeah, Liz, at this point in time, I pretty much said we are not seeing significant changes for region over region.

I mean we see a lit bit of a variation in the growth rate of this region over that region but it is nothing significantly different over the last three quarters.

Even in Europe where people are often traveling by car and obviously with these high gas prices have to you know spend a lot more money in order to get from whatever Germany to France, we are not, we are really not seeing any appreciable difference, than what we have seen before.

So from a trend perspective, again as I said, before, it is really hard to say you know, where this is going to go.

But at this point in time, 18.9% is still a pretty significant growth rate.

All right.

Thank you.

Next question will come from the line of Chris Brendler of Stifel Nicolaus.

Good morning, one of the issues you talked about last quarter.

Talked about what you would see or you may see transaction growth slower than than volume growth.

Looking at the numbers for this quarter my calculations in the US credit program the average ticket actually went up a little bit.

So that did not happen.

Any insights on what exactly is happening in US credit?

People have been pulling back I would think you would see the tickets slow down.

Do you think it is more issuer related?

Or do you see evidence of consumers moving away from credit cards given limited budgets and trying to stick to a budget on a debit card process?

Thanks.

Chris, I think it is a mixture of things of obviously what's happening with then issuer environment and the way they have to manage the portfolio period to make sure their existing accounts continue to be very profitable for them and the work around on the credit side, this does have some impact and we really said that.

We do see some step up on the average ticket.

But mostly related, I would say, to what people pump at the gas station, as well as a little bit related to food.

The one noticeable difference that we are seeing is related to fuel in this country.

So this is a US comment.

But actually from a transaction point of view, now I think it is the second quarter in a row that we actually have debit transactions being equal to credit transactions and before you had credit transactions were bigger or the number of them were bigger than debit transactions.

It is the only real discernible difference, but I do believe inflation does drive some of the things that you are seeing on the average ticket.

Okay.

One on follow-up on the same kind of topic is a big drop off in the cash kind of transactions?

Particularly in the US program.

My understanding is cash transactions are a lower margin.

That really comes at a lower margin does not significant impact on our revenues.

I think when you see the growing in the credit, the US credit and the fall off in the cash volume, that does explain, that fits together.

Chris Brendler Okay.

Finally I guess if you had any color from your issuing customers, do you think that we have seen the worst of them pulling back?

Or do you think there is more to come in the second half as we get in this tougher economic environment?

I think this is really hard to tell.

Obviously, you know, quite a number of our customers have made sure they are really surrounding their credit card and debit card portfolios with the right kind of discipline they have in order to keep these portfolios profitable.

These portfolios are still very profitable for each of the banks.

I think it really depends on which of your customers you are talking about.

Some of our customers are feeling actually they could take advantage of this environment at this point in time and are more aggressive in terms of the account/credit acquisition side and marketing side and some customers just don't feel that way.

So I think it's a mixed bag.

But in general I would say that people are probably more cautious, still at this point in time.

Because you don't know what more is going to come, or how long this kind of slow-down is really going to last.

Thanks Martina.

Sure.

next question will come from the line of Craig Maurer from Caylon.

Hey, Craig.

How's it going?

I had a few questions.

First was regarding pricing.

Just an update on your thoughts regarding where you are in the competitive marketplace with Visa, both on the acquirer and issuing side.

Okay.

First of all, on pricing, I think we had, in the first quarter, around about 6 percentage points and in this quarter about 5 percentage points and I think for the rest of the year we see pretty much a similar impact.

We did disclose some of what kind of pricing we did, which is -- a significant part is related obviously to cross border volume, as well as the number of other services and products that we get like we really needed to adjust the prices in line with the value proposition that we have for our customers.

It's obviously good that we were able to move forward with these kind of things.

In terms of comments of us versus our competition, Craig, we are not really seeing on the pricing front itself, we are not seeing two different things than what we already said at investor day.

We believe that we are doing obviously the right thing from a pricing point of view, given how we worked with our customers.

And our competition has to you know think about what they have to do.

So, but by -- in comparison, do you feel you are a relative parity on a global level?

Or has one moved ahead of the other?

Yeah, I think, first of all, it's really region by region specific.

And then you have really got to have to think about what is the pricing environment on the issuing side versus the acquiring side.

And on the issuing side as you know, it is not just list prices in terms of what would you actually charge to issue it, but it really is dependent on what kind of customer business agreements we strike, which often have rebates and incentives, really attached to performance hurdles in it.

So you have to take all of this into account and we do believe that when you take all of this into account, that we are very competitive in the market.

Okay.

Regarding the Visa agreement, that you just entered into, regarding sharing of liability.

Why now on this agreement?

What changed of all of a sudden that prompted this agreement?

Just curious.

Yeah.

I mean you know, I don't think I really can talk about the timing on why now.

But obviously, you have heard what Discover said publicly in the market in terms of damage and Visa and ourselves feel very similar in terms of you know that there is, we feel very strongly about our proposition.

We are very aligned in terms of how we look at that case.

And it happened to be the right time for us to be entering into this kind of agreement.

You might recall that there was actually court-mandated mediation prior to June 30, which was both Visa and us together with Discover.

And that court-mandated mediation, which we did enter into, did not lead to any results.

Okay.

You had commented on a shifting of resources.

Where are you focusing your new hiring these days as opposed to where it might have been a year ago?

Or two years ago?

Yeah.

I mean the one big area that is of difference is our Integrated Processing Solutions platform.

We obviously a year ago, little bit more than a year ago, so really I'm taking you back to the beginning of 2007, we did not have a lot of people related to development of that platform, as well as implementation for customers.

That has ramped up significantly over the last 18 months and that is going to continue to ramp up as we are having more customer implementation.

So in terms of one area, that's a big area.

Another area that's important for us from a numbers point of view, it is not quite of what I just talked about for the IPS platform is high growth markets.

High growth markets are important for us.

We are making significant investments in there.

And we will continue to do so.

Because we do believe that that's where we see the future.

Okay.

Where is it shrinking?

The areas where we are, I would say really massaging our head count and putting it into the right kind of business propositions where we want to see is one, you know in the US, of course.

You know, given that now the majority of our rvenues news come from overseas.

We have to make sure that our work force is very much aligned between what we want to see in the United States, versus overseas.

And in a number of other areas related to our products we do some alignments in order to be appropriately focused on the kind of things we want to put out in the market here in the future.

Thanks, Martina.

Next question from Sanjay Sakhrani from KBW.

I had a question on the assessment, rebates and incentive line.

With the deceleration on the US volume side, I would have thought we would have seen a little bit lower accrual.

Or that come down a little bit more than it actually has.

Is there any color you could provide on that line?

And then I've got a follow-up.

That is pretty hard to do.

I think we said that in the past you have to be very careful not to torture rebates and incentives on a quarterly basis.

Because it all depends, not only on what's happening in the volume in the quarter, but it also depends on what kind of new agreements we actually signed in the quarter and we happen to have signed new agreements in the quarter.

And some of that actually can drive the timing in terms of when we book the rebates and the incentives.

So I don't think there is really anything particular that you should read out of this.

But I would encourage you to really look at it over time, rather than on quarter by quarter basis.

Is there like a quick rule of thumb on how much of that line is US versus international?

No.

We don't really give that out.

Okay.

Just one question.

I want to drill down on the volume growth in Europe as you mentioned it's become kind of a hot topic recently - may tie in to the SEPA question.

How much of that growth in Europe is organic growth versus new customer addition?

The growth still remains relatively strong.

I would say it's a mixture, okay?

But I just want to give you a couple of examples.

This is really going -- coinciding with the secular trend we see from paper-based payments to electronic payments.

But when you just compare, you know, the US to let's say France, okay?

A French man uses their credit card maybe five times a month.

A German uses their credit card maybe one time a month.

So the things that Javier and their teams do, in terms of really encouraging higher use of credit and obviously toward Maestro, the debit cards if terms of the categories that they are actually opening up from a merchant acceptance point of view, and I think we featured a number of those positive examples, the Lufthansa deal, the co-op deal in Switzerland, and Auchan in France and, et cetera, I think that really does influence in how we work with our banks.

It really does influence the end customer in terms of where they find the utilization of a card much easier than utilizing cash or check.

With you that is, it is an evolutionary trend.

So I'm definitely, you know there is a big impact from that.

Customer agreements, we are, as we have said before, we are very encouraged by all the different activities we see there in the agreements that we actually sign across Europe.

So that does have an impact.

It is really hard for me to tell you this is how much it is driven organically versus acquisition.

But both factors are important in driving that growth.

Okay.

Great.

And one final question.

Just on the cash balance.

I mean, post AmEx settlement, should we expect thecarrying amount to come down a little bit factoring in the strategies?

For sure it these to factor into the capital management.

As I said we are reviewing with the Board constantly where our capital structure should be taken through.

We do have the Discover case out there with a trial date.

We are probably taking that into account in some fashion but you are absolutely right.

We have moved through one major issue which is the Am Ex litigation issue and you'll be hearing from us in the future.

Okay.

Great.

Thank you very much.

Next question will come from the line of Tim Willi from Avondale Partners.

Thank you and good morning.

A question around international.

One was, were there any trends if what you would describe as maybe your more established international markets as you went through the quarter.

Even though they may not have looked like the US, did they maybe look like a lighter version of the US in terms of a quarter growth as the quarter progressed?

And a follow-up is can you just give us some qualitative thoughts around margin profiles of the various regions of the world?

Do they sort of -- does their operating contribution approximate some of the revenue contribution or some of the larger more mature markets much higher much lower margins versus a corporate average?

Okay, Tim.

Let me take your first questions first.

On the international front, you know, let me just pick region by region.

But on Europe, we do have a mixture.

I already quoted the UK as well as Spain.

A couple of other countries that seem to be feeling a heat from an economic point of view; Italy, , Portugal, France and Ireland.

But that does not significantly show up in our volume growth.

Again I truly believe in terms of what Sanjay and I just talked about, the secular trend opening up the merchant category, making consumers more comfortable using the cards does definitely have an impact on this so despite the economic environment we feel very comfortable on the growth over there.

In Asia Pacific again you can see that the growth is still very healthy.

When you look at China and India and a couple of other markets, they are impacted by the higher commodity prices we see across the world.

We are watching that very carefully but given the significant potential for moving people from cash to electronic based payments I think we will see a good balance there - we feel good about it.

Latin America I think that is like a two-headed story a little bit.

You know Mexico does feel the credit crunch more and we do see that a bit more in our data versus Brazil.

Brazil is just going gang busters and we are feeling very healthy there.

So I think you have a bit of a mix.

So there is not a one-size fit all but you really have to take it market by market.

But what is really happening in the US and how deep the US went down from an economic down turn point of view.

The UK is maybe closest to that but we are not quite yet seeing the other countries being there and there are other things in the market that would offset that.

In terms of the second question the margin profile question, as you know, we really don't disclose you know this kind of data from a regional point of view.

I mean the only pointers that I can kind of give you is where we not only see the volume, where we see the charge the assessment fee we process the transactions.

So where we also get a transaction fee, those are obviously very good markets for us and from our filings there are really five markets in the world where we do process most of the volume.

And that you know, that's a particular focus.

That is really important you know.

That is where we want to expand

Is it inappropriate to think that in some of the more emerging economies, while they might be smaller now and are experiencing extremely strong growth just the investments you are making in brand and resources would have those obviously being a lower margin region for you with a lower margin upside over time?

It depends on the infrastructure in the market, how the acquiring actually gets done in the market.

So for some markets you are absolutely right.

We are making investments.

We are encouraging the right kind of behavior in order to get to electronic payments and that's where you might see some lower margin.

But there are actually some other emerging markets where the infrastructure is in such a way where we don't have to do that.

Great.

Thank you so much for your time.

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

Last question will come from the line of Charles Murphy from Morgan Stanley.

Thanks very much.

Martina, I was wondering if you could update us what you have seen in July for cross border GDV and for process transaction growth?

I really can not.

The only thing that we see on a weekly basis is processed volume at this point, we also see process transactions.

And I think from what I said before in response to one of the other questions, is that we really see in July, the same kind of things continuing as we saw it in the second quarter, okay?

Okay.

As a quick follow-up I was wondering if you could clarify the outlook for A & M spend should third quarter be lower than second and fourth be lower than third?

I think you got it.

I would turn the call back over to Martina for closing remarks.

Yeah.

I just would like to say thank you first of all for joining us this morning.

Obviously, you know, we talked about the difficult economic environment in the US.

But I just want to say how pleased we are with our results for the second quarter.

We really believe our business fundamentals continue to provide a solid foundation for us to meet our business objectives not only in 2008, but also for the longer term.

We definitely remain committed to grow our business and we manage our costs in order to drive shareholder value.

So thank you for your time today.

If anyone has any further questions, please feel free to contact investors relations.

Thank you for your time.