萬事達 (MA) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2008 MasterCard Earnings Conference Call.

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

We'll conduct a question-and-answer session toward the end of the conference.

(Operator Instructions)

I would like to turn the call over to Barbara Gasper, Group Executive Investor Relations.

Please proceed, ma'am.

Thank you, Antoine.

Good morning to everyone.

Thank you for joining us today, either by phone or webcast, for a discussion about our fourth quarter and full year 2008 financial results.

With me on the call this morning are Bob Selander, our Chief Executive; Martina Hund-Mejean, our Chief Financial Officer; and Tara Maguire, our Corporate Controller.

Following comments from Bob and Martina, highlighting some key points about the business environment and our fourth quarter and full year results, we'll open the call up for your questions.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website of MasterCard.com.

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

A replay of this call will be posted on our website for one week until February 12th.

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, I would now like to turn the call over to Bob Selander.

Bob.

Thanks, Barbara, and good morning, everybody.

I would like to start out by saying that I'm pleased that we've been able to deliver another strong quarter of earnings results.

We saw net revenue growth of over 14% despite the headwinds from a strengthening U.S.

dollar, and improved our operating margin by approximately 22 percentage points versus the year-ago quarter.

We have seen the economic downturn hit consumers and businesses alike, but our business model and global diversity provides a good degree of resilience in this environment.

I would like to take a few moments to discuss our view of the global economy, our fourth quarter results, which Martina will take you through in more detail, and then offer some comments about our capital structure.

I'm on slide two in the material that you may be following along with.

Turning first to the economy.

As a result of the current economic turbulence, the world is facing significant challenges which can only be addressed with time.

The U.S.

recession continues with low consumer confidence due to a difficult housing market impacting net worth and rising unemployment now putting more stress on household incomes.

The economic issues are not limited to the United States.

We're seeing government bailouts and economic stimulus packages from the U.K.

to China to the Netherlands.

We're seeing banks in several countries being or close to being nationalized.

We expect the climate to remain challenging in 2009 and we're not counting on any improvements this year.

Although precise timing is something no one can predict, we continue to expect that things will begin to improve in 2010 depending on stabilization in the housing markets, the specifics in timing of any stimulus packages and the resulting impact on consumer confidence and employment.

While we're not immune from the global economic problems, we are fortunate to be part of an industry that offers opportunities for growth due to the continued secular trend of people moving away from cash and checks to electronic forms of payment.

Of course, certain countries are particularly hard hit, but we still see tremendous growth opportunities in many other countries around the world.

In the fourth quarter, we saw the following:

-In the U.S.

gross dollar volumes and transactions for credit declined, while debit still grew in the mid-single digits.

-We continued to experience volume and transaction growth in Europe in the mid to high-single digit range and none of the major countries in that region have yet dipped into a decline.

-While Latin America's growth was in the low-double digit area overall due to declines in Mexico and Venezuela, Brazil continues to be a bright spot with solid double digit growth.

In addition, our South Asia/Middle East/Africa region is also still experiencing significant growth.

Consistent with the October data that we shared with you in our last earnings call, cross-border growth continued to decelerate in November and December and grew at only 7.5% for the quarter compared to 27% for the year ago quarter.

It is also down sequentially from 18% in the third quarter of 2008.

U.S.

cross-border volumes saw declines in the low teens, while the rest of the world experienced growth.

When evaluating MasterCard process volumes and transactions through the first four weeks of January, we saw the following:

-Worldwide processed volume in January was essentially flat.

-Cross-border growth continued to decelerate in January, but was still positive despite further declines in the United States.

-It is important to note that worldwide processed transactions were up slightly, driven by a pickup in the United States relative to what we saw in the fourth quarter.

While we cannot control some of the issues that are pressing on the economies around the world, we are focused on the things that we can control, such as effective management and prudent investment of our resources.

And we continue to remain committed to controlling our overall cost base.

As you have seen in our fourth quarter numbers, we were able to deliver a 1.4% decrease in G&A expense, primarily through initiatives that resulted in travel and entertainment expenses that were down 50% year-over-year and professional fees that were down almost 20%.

Similar to 2007, we had some severance charges in the fourth quarter of 2008.

In these most challenging of economic times, we continue to better align our capabilities to meet our customers' needs, as well as ensure that we continue to innovate and deliver in ways that positions us for the future.

Based on internal and external feedback that we received, we have made recent organizational changes to ensure that we're delivering in a more efficient and cost-effective manner to our customers.

We're focusing, in particular, on the United States and Western Europe, while still continuing our investments in the emerging markets and innovative product and services offerings.

As a result, you can expect to see additional severance charges in the first quarter and perhaps in the second quarter of 2009, but we're not yet in a position to size that expense.

Electronic payments remain vital for commerce around the world.

Consumers and businesses will still spend.

While the current economic climate will likely continue to put pressure on volume growth in many countries around the world, the secular shift from cash and checks to electronic payments will continue given the push for greater efficiency and effectiveness.

Our business model, our geographic diversity, the work we're doing with our customers and merchants around the world and the continued secular trend should enable us to better navigate these challenging times.

Just a few words about our thoughts on capital structure.

We continue to believe that at this point, a strong balance sheet with a good cash position and positive operating cash flow is the right place to be.

It creates a level of comfort in these tough economic times and provides flexibility should we see attractive investment opportunities, such as our recent Orbiscom acquisition.

As you know, our Board continuously evaluates our capital structure and supports maintaining our strong position.

Earlier this week, our Board approved a regular quarterly dividend, as well as a conversion program for 2009 of up to 11 million Class B shares which would, if fully subscribed, bring the Class B ownership to just above 15% of total shares outstanding.

With that, I'll now turn the call over to Martina for a detailed update on our financial

Thanks,

Bob, and good morning, everyone.

As Bob mentioned, we are very pleased to cap off 2008 with strong fourth quarter financial results.

Turning to page three of the slide deck, in the fourth quarter we delivered net revenue of $1.2 billion, up 14.2% over the comparable period last year.

This was driven by growth in processed transactions, moderated rebates and incentives, as well as fees for other services.

Additionally, pricing changes contributed approximately 8 percentage points to revenue growth.

Currency fluctuations of the Euro and the Brazilian real, relative to the U.S.

dollar, tempered our revenue growth by 3.5 percentage points.

So, on a constant foreign exchange basis, net revenue growth was 17.6%.

Excluding a special item of $6 million related to the settlement of a consumer protection case in California that was an off chute of our US Merchant litigation, our operating income was $468 million.

This resulted in a strong operating margin of 38.2%, which is a 22.2 percentage point improvement over last year.

The combination of our strong revenue growth and effective cost management has enabled us to leverage our operating margin.

As you know, our operating margin is typically the lowest in the fourth quarter due to seasonal factors.

MaterCard's effective tax rate was just over 46% in the fourth quarter of 2008 versus 34.9% in the comparable period in 2007.

The increase was primarily due to a remeasurement of deferred tax assets and increased FIN 48 tax reserves.

In the fourth quarter, we delivered net income of $243 million or $1.87 per diluted share, excluding the special items.

Turning to page four, during the fourth quarter, the global diversification of our business has helped us weather the cyclical downturn in the U.S.

Our ability to generate significant volume, transactions and revenue from economies outside of the United States have cushioned our business from the declines that we experienced in the U.S.

Worldwide growth dollar volume, or GDV, grew 3.4% on a local currency basis in the fourth quarter, but declined 4.7% on the U.S.

dollar converted basis to $605 billion.

The lower GDV growth rates are due to the strength of the U.S.

dollar against most other currencies during the fourth quarter.

The deceleration in the overall local currency growth rate can be attributed to the U.S.

The GDV growth declined 5.2% due to negative credit growth.

Worldwide debit GDV, however, grew 10.7% for the quarter.

U.S.

debit GDV grew 5.8%, which was a slower pace of growth than the 15.9% from the same quarter in 2007.

Elsewhere, GDV continued to grow at healthy rates across every other region on a local currency basis, although at a much slower pace than what we have seen either on a year-over-year basis or on a sequential basis.

Although not shown on page four, on a local currency basis worldwide purchase volume was up 3.1%.

Similar to the GDV trend, U.S.

purchase volume growth rates declined 4.6% for the quarter, driven by a decline in credit volume.

Cross-border volume grew at 7.5% for the quarter versus 27% in the fourth quarter of last year.

We experienced exceptionally strong cross-border growth during the fourth quarter of 2007 making this a very difficult comp to beat.

Therefore, the results are more positive than the absolute number implies given the current global economic turmoil.

While travel patterns remained largely the same on a year-over-year basis, the only significant changes we saw were fewer Latin Americans traveling to the U.S.

and an increase in intra-regional cross-border travel within Latin America.

U.S.

cross-border growth did decline low-double digits during the quarter, but was more than offset by growth from the other regions, principally in Europe and in SAMEA.

European cross-border volume growth remains strong.

And remember that a majority of the European cross-border volume is generated on an inter-Europe basis.

And consumer cross-border volume growth moderated somewhat, but we still saw a strong double digit growth in our commercial cross-border volume.

Let's turn to process transactions.

Process transactions increased 6% compared to the year ago quarter to $5.5 billion.

Even in the U.S.

process transactions were at low-single digit rates.

Therefore, we're still seeing a secular trend of people moving away from cash and checks to electronic forms of payment.

Let's turn to page five.

You see that net operation fees increased 16.5% to $966 million in the fourth quarter.

Gross operation fees increased 13.2% to about $1 billion.

This growth was driven by two factors.

First, pricing changes implemented in January of 2008 on cross-border acquiring volume and some European pricing initiatives implemented this past October.

And second, the growth in process transactions and fees for other services, partially offset by volume declines when translated into U.S.

dollars.

In the fourth quarter, net operation fees were 92.4% of growth operation fees, slightly higher than the same quarter in 2007.

This was due to a decline in rebates as a result of lower volume and adjustments for previous estimates.

Since we won't be filing our 10-K until later in February, we have included the quarterly operation fees detail for your reference in appendix B to the slide deck.

On page six, we show that net assessments increased 6.1% to $259 million versus the fourth quarter of 2007.

Growth assessments increased 6.3% to $604 million, primarily due to pricing and increased revenues as a result of growth in debit cards worldwide.

The overall growth was partially offset by lower volumes, when translated into U.S.

dollars.

Net assessments, as a percentage of gross assessments, was essentially flat compared to the same quarter in 2007.

The normal seasonal uptick in the fourth quarter rebates and incentives was offset this year because of lower volumes and adjustments for previous estimates.

Now we'll turn to page seven for some detail on expenses.

We have continued implementing a number of expense management measures as part of our commitment to a flat expense structure going forward.

During the fourth quarter, excluding the special item, total operating expenses decreased 16%.

Currency fluctuations of 2 percentage points contributed to the decline.

Therefore, total operating expense decreased 14% on a constant FX basis.

The decrease was mainly driven by the following:

-General and administration expenses decreased 3.4% with currency fluctuations contributing approximately 2 percentage points.

On a constant FX basis, our general and administrative expenses decreased 1.4%.

The decrease was due to the following;

-Lower personnel costs accounted for 3.3 percentage points of the G&A decrease and we're about flat on a constant FX basis.

-Travel expenses decreased approximately 50% as a result of cost reduction initiatives implemented during the fourth quarter.

-And professional fees also declined by approximately 20% during the quarter due to a reduction in legal costs and consulting expenses.

-Advertising and marketing spend decreased by 32.8% versus a year ago period, with approximately 1.9 percentage points related to the impact of foreign currency fluctuations.

On a constant FX basis, therefore, A&M decreased 30.9% for the quarter.

We have included the quarterly general and administrative expense details for your reference in appendix C.

Turning to page eight, let's take a quick look at our full year performance, which was once again impressive.

We delivered net income of $1.2 billion, or $9.45 per share on a diluted basis and excluding special items.

This includes $0.42 per share from gains on the sale of the remaining portion of our investment in Redecard.

We achieved full-year net revenue of $5 billion, representing growth of 22.7%.

Excluding the 2.5 percentage point impact of effects, net revenue growth was 20.2%.

Pricing adjustments contributed approximately 6 percentage points to the growth.

Net revenue growth was also driven by strong growth in gross dollar volume and processed transactions, including cross-border volumes which grew for the whole year at 16.6%.

Finally, we saw our full year operating margin improve 11.7 percentage points to 39% from 27.3%, excluding the special items in both 2008 and 2007 respectively.

Moving to the cash flow statement and balance sheet highlights on page nine.

After litigation payments of more than $1 billion, we still generated $413 million in cash from operations and ended the year with cash, cash equivalents and current investments of $2.1 billion.

The impact of 2008 litigation settlements resulted in decreased stockholder equity, as well as increased litigation liabilities and deferred tax assets.

Additionally, the impact of the Orbiscom acquisition is reflected in our year-end 2008 balance sheet and cash flow statement.

I will now hand it back to Bob to discuss our outlook for the year and share some recent business highlights.

Bob?

There is no reason to assume that the economic slowdown across the world will improve for the balance of this year.

The global financial markets are undergoing unprecedented change that certainly impacts our industry and we're positioning ourselves for these changes as detailed on slide number 10.

When looking at 2009, we continue to expect the following:

-Net revenue growth will likely fall below the average annual range of 12% to 15% that is in our longer term objectives.

While we intend to invest wisely for long-term growth, we have demonstrated our commitment to manage expenses more tightly.

Our total operating expenses are expected to be essentially flat versus 2008.

We will use the levers that we have in G&A and advertising and market -- excuse me, advertising and marketing prudently and appropriately depending on the economic environment and our customers' needs.

As I said on our last earnings call, we expect to meet our longer term objectives of annual margin expansion of 3 to 5 percentage points and average annual net income growth of 20% to 30% this year, as long as we see high-single digit revenue growth.

If revenue growth falls below this level, we would need to evaluate whether to make further adjustments to our expense structure, also keeping in mind our intention to continue making appropriate investments for future growth.

Remember, all of our objectives are on a constant FX basis, so our as-reported numbers will include any impact of foreign exchange.

Given the relative strength of the U.S.

dollar, we expect that foreign change will present a headwind for the revenue and net income lines this year and a tailwind on the expense line.

Our longer term performance objectives also assume an effective tax rate of 35%.

We remain vigilant about the economic developments that affect both our customers' businesses and consumer spending patterns.

We will continue to evaluate our objectives as we move through 2009 and adjust them as appropriate.

Finally, while our business model may not experience the growth trajectory we've seen over the last few years, we feel both fortunate and optimistic with the business prospects ahead of us.

We believe this will continue to deliver attractive results for our shareholders.

Before moving to the Q&A session, I would like to share with you some of our recent business successes from around the world.

In addition to achieving strong fourth quarter operating results, we remain focused on delivering best in class products and services to our customers.

We made solid strides in opening up new growth opportunities that leverage our unique processing capabilities and solutions, enhanced our strong position in prepaid, and despite the challenges that they face, we continue to be recognized by our customers for the value and partnership we provide as we were awarded with new opportunities and agreements for continued growth.

We recently announced a new partnership with global retail leader Carrefour in France, launching the first MasterCard-exclusive branded cards, incorporating PayPass technology and combining debit and credit payment applications on a single card.

This agreement includes our full suite of domestic processing capabilities.

Likewise, MasterCard Integrated Processing Solutions, or IPS, the debit and prepaid processing platform we introduced in 2008 continues to build momentum with the signing of another customer.

Swiss Bankers became the first financial institution to take advantage of the global prepaid transaction processing capabilities of IPS and we hope to have more news to share with you on the IPS front in the near future.

Together with MasterCard, the Italian postal system launched the first national government benefits disbursement program in Italy using MasterCard-branded prepaid cards.

With the addition of Poste Italiane, our leadership in the prepaid public sector continues to grow.

We continue to expand our efforts to provide global remittance services that leverage our global network to extend financial services opportunities among bank and unbanked customer segments.

In November, we launched MasterCard Money Send in association with the Development Bank of Singapore.

The cross-border remittance service enables consumers in Singapore to send money via the Internet to friends and family in Indonesia, India, Malaysia, the Philippines and Thailand.

With MasterCard Money Send we're enabling our issuing banks to access new customer segments and offer payment products, as well as other banking and financial services in developing markets.

In India, Citibank launched the first MasterCard premium debit program in South Asia, targeted at high net worth individuals and senior executives in large corporations.

In summary, as evidenced through our accomplishments in the fourth quarter, we are committed to leveraging the strength of our global network, processing capabilities, strong relationships and our product development platform in order to drive business results for our issuers, acquirers and other partners around the world.

I'll now turn the call back over to Barbara so we can begin taking your questions.

Thank you, Bob.

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 timeframe, we ask that you limit yourself to a single question with one follow-up and then queue back in with additional questions.

Operator?

(Operator Instructions) Your first question comes from the line of Julio Quinteros with Goldman Sachs.

Please proceed with your question.

Great, guys, good morning.

Wanted to just sort of hit one quick thing on the cross-border commentary.

If you could just kind of rehash what you guys said there about the volumes there coming out of January.

I just want to make sure I got that right and also related to that, how to think about some of the cross-border pricing benefits as you think about 2009 .

When should those anniversary and just any other color that you could provide on the cross-border side would be helpful.

Thank

Let me go back to the cross-border.

I'm trying to recall specifically what you were referring to, Julio.

The January volumes and transactions that I mentioned, which were through the first four weeks of the month of January, we saw worldwide process volume that was essentially flat for the same period the prior year.

Now remember this is what we see that is processed.

It may not -- in fact it does not include the gross dollar volume in transactions that we do not process, but we think it is a pretty good indicator.

Cross-border growth continued to decelerate in the month of January, although it was still positive.

Ok.

And we've seen the U.S.

continue to decline.

So, what that means is individuals who have cards from U.S.

financial institutions are not traveling and I think you've probably have seen that in some of the airline statistics and data that have been released through other sources in the U.S.

marketplace.

I think it is important to note, and I believe I also mentioned this, that worldwide processed transactions were up and that was driven by a slight pickup in the U.S., relative to what we've seen in the fourth quarter in terms of the process transactions.

All right, okay.

And then just lastly, all of your guidance is constant currency, just to confirm that, right.

That's correct.

Okay, thank you.

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

Please proceed with your question.

I have something I need a clarification on and then also a question.

It sounds like you still expect 3 to 5 points of margin expansion and 20% to 30% as long as high-single digit revenue growth is there for this year.

But, just to confirm, there wasn't any point guidance on revenue growth for '09.

That's correct.

Got it.

So, I guess assuming current trends persist, I'm actually not going to ask about volumes and revenue, but I guess really on rebates, that was sort of the little bit of a delta from what we expected.

It was better than what we expected.

Can you, on the bottom-line can you give us some guidance on how that might trend assuming current volume trends persist and also how does FX impact this rebate line?

Thanks.

Let me take that.

First of all in the fourth quarter, as you already said, we saw some moderating in the rebates and incentive line and some of that is due to lower volume growth that we had in the fourth quarter.

However, we also had some adjustments to prior estimates.

So, you also have something in there that is maybe more of a one-time nature.

So, in terms of 2009, if volumes continue to be the way that they were in Q4, I think you should see a little bit of moderating on rebates and incentives, but not to the extent that what you saw in Q4.

I don't think this is a linear trend.

It is going to be just a little bit of an impact.

In terms foreign exchange, Tien-Tsin, we're not really talking about the rebates and the incentive line separately from a foreign exchange point of view.

I think I laid out at the last earnings call, kind of a rule of thumb that you might be able to use, in particular as it relates to our Euro exposure.

I am referring back to for every $0.01 move in the U.S./Euro, our net revenues are impacted by about $8 million to $9 million.

Our operating expenses are impacted about $4 million to $5 million.

So we have a net $3 million to $4 million on the operating income line.

When you translate all of this, and maybe I can be a little bit helpful for you guys to think to 2009.

The Euro is now at 1.33-1.35 kind of range versus the U.S.

dollar.

If you translate all of these rules, we probably are going to expect a headwind, assuming that the dollar stays where it is, of around 4 percentage points for the year.

4 percentage points for the year.

Great.

Thank you.

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

Please proceed with your question.

Hi, good morning.

Thanks for taking my question.

Could you comment a little bit, Bob, on sort of the pricing environment, particularly in the U.S., with respect to what's happening at the issuer level and the pressure that's, that your big issuers are facing.

And also as a follow-up, could you comment on what your view would be of the risk to your business associated with the potential nationalization of a big issuer.

Couple of thoughts on pricing.

I believe what we've indicated to you is that in order for us to realize year-over-year improvements in pricing, we need to deliver improved value to our customers and that equation hasn't changed.

From the perspective of what's going on within the U.S., clearly, all of our customers are feeling stress.

And if you take a look, particularly on the credit card side of the business, we've seen significant increases in delinquency and charge-offs occurring.

We do not expect that trend is going to abate, so we think our customers are going to continue to have an all-hands-on deck approach where they try to maximize what they get from their current customers and work very hard on the credit and collections side of the equation.

We think that's going to persist throughout the year.

As a result, we've been sort of reshaping our thoughts in terms of how we serve those customers.

And we do not expect that we're going to see a buoyant acquisition programs or some of the other things that we may have seen in past years return in the course of 2009.

Competitors continue to make, in addition to the customers' expectations, continue to make pricing challenging in the U.S.

marketplace.

The second part of your question was speculation about what happens if there is a nationalization of a large U.S.

issuer.

I don't know that there's any model that anybody can look at.

I think it has been pretty clearly stated by a lot of people in Congress and others in the administration that they're not looking to nationalize banks.

They're looking to support banks to help them restore the U.S.

economy.

So that's not something that we currently are thinking about, other than in the context of what we've seen when banks run into difficulties.

There, for banks, is a pretty straightforward regime in terms of what happens if a bank runs into challenges.

We've seen that with the FDIC and other agencies in terms of the relatively smooth, I would describe it, handling of the ongoing obligations of those institutions and the continuation of those programs on which consumers and businesses are dependent.

We would much rather have all of our customers thriving.

We're going to just have to tough it through and help them tough it through these next challenging quarters.

Thank you.

Your next question comes from the line of Craig Maurer with Calyon.

Please proceed with your question.

Good morning.

Thanks for taking my questions.

The first question I had for you was could you comment on the average ticket you saw or the impact you saw in the fourth quarter on your average ticket size and if you can quantify the impact the gas pricing had or characterize it a little bit?

Thanks.

Hi, Craig.

Average ticket prices in the U.S., as well as for the rest of the world, has decreased slightly.

So, we did definitely see an impact, while we saw that consumers were transacting more.

As you could see from a transaction growth point of view, average ticket price, in particular, has gone down but it has gone down slightly.

What was your second question relating to?

Gasoline.

Just in terms of what happened with gasoline, as you know, in the U.S.

gas prices are down dramatically from where they were a year ago.

And gasoline represented about 6%-6.5% of our U.S.

volume and about 15% of transactions during the fourth quarter.

Now, if you were to make adjustments for year-over-year change in gas price, it would have increased slightly as a percentage of volume.

On the other hand, those prices were down dramatically, Craig.

Just to build a little bit on Bob's comment on the gas, when you see our purchase volume in the U.S.

being down by 4.6%, probably around, not probably but definitely around 25% of that decline was due to lower gas prices.

Ok.

And just one follow-up.

It was something that Visa said last night that I thought maybe you guys can also characterize for us.

In terms of the comment the percentage of volume driven by debit or pay-in-full type customers that aren't revolving.

It is a question around what would the impact be from dramatically lower options to buy credit lines in the U.S.

Thanks.

I'm not sure I fully understood that.

Well, the question's around what would the impact be if open credit lines were cut dramatically in the States and it was characterized in the answer by the percentage of volume that's driven by either customers that pay in full and don't revolve or debit-driven convenience usage type customers.

I think that's a reasonable thing that if a consumer who would otherwise have been spending has their line capped, then obviously that's going to adversely affect that cohort of customers.

But what we have seen is the declining in credit purchases has been in bigger ticket items furniture; higher-priced, over $1,000 type items; electronic goods; et cetera.

We saw that right through the holiday shopping season.

And those year-over-year declines have persisted.

So, I would argue that consumers are also being more disciplined.

They either have an -- are experiencing challenging times and are foregoing things that they might have liked to have had, brand new big screen TVs or whatever it might be, and they're paying for basics.

So, I think there are lots of factors that converge there, but I think the one that you mentioned could be and probably is one of those contributing factors.

Thanks.

Your next question comes from the line of David Hochstim with Buckingham Research Group.

Please proceed with your question.

Thanks.

I wonder, could you give us a little more color on the outlook for price increase benefits over the next year.

Should we continue to expect sort of 6% year-over-year benefit?

David, as we have said in the past, we're really only able to make pricing adjustments if you deliver a particular value propositions to our customers.

As you can appreciate in this kind of environment, where our customers are having very challenging times, we are going to be extremely careful and it has to be completely and directly tied to what kind of product or service we will give to them.

We have laid out there in the past in terms of what we think is our normal kind of annual pricing adjustment, which is in the 200 basis points range and at this point in time, that is still where we are.

But this is a very challenging time and we're going to have to deliver in order to be able to do something like that.

I guess maybe another way to ask it is just how much of what we saw this quarter will continue or anniversary in October or later in the year?

Or sooner in the year?

Well, we have, as you know, the majority of our price increases were in January of '08.

So, all of that has anniversaried at this point in time.

And we made some pricing adjustments in Europe in October and, obviously, that would be then anniversarying next October.

Ok.

Then could you just give us some color on the change in spending growth and say World Cards versus basic cards?

Is there much of a noticeable change in consumer behavior?

We have really not seen any big differential on that, other than what Bob has mentioned in terms of where people are spending on high ticket items.

We really don't see a lot of spending on that.

It is really on items below $1,000.

It seems to be that the $1,000 threshold is fairly significant.

The other thing that where you see an impact is obviously on travel, right.

You can see that travel volume is pretty much down.

We see that on our network, too.

Interestingly enough, transactions are up because when you go and travel on an airline these days, you get charged for all sorts of wonderful extra things such as checking in a second bag, actually getting a bottle of water on the airplane, et cetera.

We're seeing kind of those trends going on.

So, it is really just -- it is for pricing, too.

Then airline ticket prices down, that's driving volumes?

No, I think that the observation is that in regard to your specific question, we're seeing across the board changes in consumer spending patterns.

If you were to take a look at so-called the luxury-end retailers, et cetera, they've had even more significant declines, 15%-20% types of year-over-year sales declines as compared with the more day to day operators, supermarkets and so forth.

So, that's occurring across all sorts of cards.

If you look at consumer travel, airline and hotel are down also in orders of magnitude of 10% year-over-year in terms of dollars spent.

Now, that cuts across, obviously, consumers as well as the commercial and corporate card products.

I think Martina's observation was related to the fact that even though the dollars being spent on airlines are down, transactions continue to be strong relative to other categories and relative to what we would have otherwise expected given the dollar volumes.

That's because there are more transactions occurring around a flight.

So, an individual who buys a ticket for $500 winds up also buying a bag check for $20 on their card.

So suddenly you have got two transactions where we only had one before.

I guess I was just also getting at the fact that prices may be down more than 10%, as well, on the ticket.

So you're getting more transactions and still being affected.

It is increasingly difficult for us to parse the data given the incidents now, at least in the airline category, of these smaller ticket transactions coming through.

We used to be able to make a very good call on how much was price versus volume.

It is getting more challenging now because we have to sort out certain transactions that aren't actually ticket related.

Okay, thanks a lot.

Your next question comes from the line of Jason Kupferberg with UBS.

Please proceed with your question.

Thanks and good morning, guys.

Just a quick clarification before my question.

The EPS headwind from the higher tax rate, seems like you would have gotten another, am I right, $0.25 or $0.30 of EPS upside if not for the abnormally high tax rate.

Is that accurate?

Yes.

I presume you did the calculation versus a rate of 35%.

Right.

And yes.

But as you can appreciate, we had a number of significant items that not only came through in the quarter but really for the whole year.

We had to make the adjustments and that's why Bob had mentioned in his remarks that for next year you should really be thinking about a tax rate of around 35% again.

Yes.

Ok.

That's helpful.

And then understanding you don't give point guidance for 2009 specifically, maybe we can just talk a little bit about scenarios.

If the January volume trends that you observed stay essentially unchanged for the balance of this year, how should we then think about what the implications would be for top and bottom-line growth?

I'm sitting here musing about that one because I haven't asked that question in so many words.

I guess I observed, based on what we saw in January, it will be a challenge to get to the high-single digit top-line growth that we mentioned would be necessary for us before taking other actions to achieve both the operating margin and net income growth rates that we've suggested we would like to be achieving over time.

So, that means that we're working hard on creating flexibility and options as it relates to where and how we spend money should that situation either persist or worsen over the course of the year.

Ok.

And I think Adam has a quick follow-up.

Good morning, guys.

How are you?

Hi, Adam.

Quick question on the cost side; really great job in the fourth quarter.

If you needed to go more than just being flat with '08, could you do so?

And the second part of that is when things do come back on the top-line and they reaccelerate again when the trends become better, are the costs that you're cutting now, do they disappear or does some of them get -- do some of it get added back once the volumes start to pick up again?

Thanks.

Two parts to that or two parts to that question.

Let me take the first one in terms of could we be better than flat.

Again, let's stay with constant FX, because obviously we get benefits on the expense line, Adam, when the dollar strengthens.

Whereas it is a headwind for us on both revenue and net income.

From my perspective, we're trying to build, if you will, around an array of scenarios.

And while we have one, that's the one that we're currently managing against, we recognize it could get better or it could get worse.

And to the answer I gave it, the previous question, we're trying to find ways to create more flexibility.

So, think of that as yes, we're trying to find ways that we could be better than flat.

One of the trade-offs that we're constantly making is how much are we potentially foregoing or penalizing the future.

Obviously, if there is a dollar that's being spent that doesn't need to be spent or a Euro that doesn't need to be spent, regardless, then that goes.

But the one that we think has a good business case around it as we look through a challenging 2009 and see things not only stabilizing but improving in 2010, those are the kinds of things we're constantly running into as we go through this process.

At the end of the day, we do not want to penalize our future by mindlessly whacking away at those things that we think are valuable for improving performance, both for our customers and shareholders in the future.

Thank you very much.

Adam, with respect to the second part of your question, we're not looking at deferral of cost.

We're really looking at things that we would be taking out in a sustainable way for the efficiency of the Company.

And the things that you've been seeing in terms of what we're doing on travel and entertainment expenses, what we're doing on professional fees, what we're actually doing in the procurement area, for instance, media rates on the marketing side, et cetera, those are all contributing factors to what we might be able to achieve.

Before we move on to the next question, I would just like to clarify a comment I made a little earlier today.

It was related to the question on foreign exchange.

I put out there a number in terms of what kind of headwind we might be expecting in 2009 if the U.S.

dollar versus the Euro exchange rate were to be staying at about today's levels.

The number that I put out it was 4% of net revenue headwind.

So, just want to be clear that everybody understands that.

Maybe we move with that to the next question.

Your next question comes from the line of Chris Brendler with Stifel Nicolas.

Please proceed with your question.

Hi, thanks, good morning.

Can you talk at all about the mix of spending between discretionary and nondiscretionary and what happened in the fourth quarter and do you possibly get some of that back in the first quarter with less holiday spending.

And also a related topic, did you see any evidence of consumers switching away from your products to go back towards cash to help their holiday budgeting and potentially that impact may go away as you get less holiday spending in the first quarter.

Just could we address a couple of those trends, if you could, please.

On the discretionary versus nondiscretionary, I think that trend has persisted in terms of consumers managing their finances in a way that they're buying the things they need to to feed their families, get themselves to and from work and so forth.

And they're clearly cutting back in those areas of things that they might like to have but at this point in time don't feel comfortable spending on.

We've already mentioned the slowdown, year-over-year in the larger ticket items.

And I think you also see that to some extent in the decline in credit and charge base spending in the U.S.

as compared with the continued growth in debit.

If you look at the volume reduction in credit, the reduction on cash is much more significant and you can see that in the attachment to the press release where year-over-year cash growth fell quite considerably in the U.S.

on credit and charge programs.

That relates to things like balance transfers, obviously the ATM and other activity would also get lumped into that number, but it is principally because of the slowdown in the account acquisition programs that we're seeing in the U.S.

credit markets.

I'm trying to recall the -- oh, the second thing was is there some, I guess you would call it counter secular movement back to cash.

I don't believe there's any evidence showing of that in terms of our continued growth in transactions.

And as I mentioned, the January data in the U.S.

showed year-over-year transactional growth persisting.

We're just about to start going through our SpendingPulse, which covers all categories for January, but I believe that that will confirm that mix continues to move towards card and electronic based transactions.

Thanks.

your next question comes from the line of Wayne Johnson with Raymond James.

Please proceed with your question.

Good morning, guys.

This is actually [Gaurov Vohra] on behalf of Wayne.

Hi, Gaurov.

Quick question.

The acquisitions of Washington Mutual and Wachovia, have they -- what percentage of revenues or transactions did they compose and have those acquisitions had any impact or will they on your domestic portfolio?

First of all, Gora, we really don't give any customer-related information on our revenue detail.

So, from that perspective, I can't really help you.

Yes, I think the way you should think about it is both of these firms are still, if you will, going concerns.

And I expect that JPMorgan Chase with WaMu is going to try and keep as many of those customers as they can, while seeing the benefits of consolidation on the expense side.

And the same game will be played out by Wells Fargo.

Clearly the Wachovia branch network is very complimentary, as it is a more East Coast branch network than the existing Wells' footprint.

So, we look forward to working with both of these players.

Washington Mutual, as you know, is an extremely important debit customer of ours.

Absolutely.

JPMorgan Chase is an extremely important credit and debit customer of ours.

So what we now have is a bigger and even more important customer in both of these transactions.

Ok, great.

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

Your next question comes from the line of Chris Mammone with Deutsche Bank.

Please proceed with your question.

Thanks.

I guess since we won't get the K until later in the month, any update on the interchange litigation, any change in some of the key milestones on class certification or I guess you know discovery at this stage?

Anything to call out there?

Well, in terms of the timeline on the U.S.

interchange cases, fact discovery was essentially completed last; I guess it was during the month of November that was pretty much wrapped up.

There have been briefings taking place on class certification during the month of January.

The court has not scheduled any oral argument, to my recollection, with regards to that class motion.

We expect that this is going to play out over the course of the next several months and we believe that expert reports will be coming in the month of May and are from the plaintiffs, and that our experts' reports will come in the course of the second, late second or early third quarter.

At this point in time, there's no trial date that's been set.

So we expect this case is going to be persisting through this year and well into 2010.

Ok.

I guess if I could do -- fit in one quick follow-up.

Martina, could you just remind us what percentage of cross-border volume doesn't involve U.S.

consumers?

I think we have -- I'm not sure that we actually put out numbers there, Chris.

Chris, what we've said is that more than half of the cross-border volume we have comes from Europe.

But that's about the best specificity that we provided there.

That's just intra-Europe traveling.

Well that includes both intra-Europe and outside of Europe.

European cardholders?

It is the bulk of it but obviously a significant portion of it is intra-Europe.

Got it.

All right, thanks guys.

This concludes the question and answer portion of today's call.

I would now like to turn the call back over to management for any closing remarks.

I would like to just say thank you all for joining us again today.

We think we had a very strong fourth quarter.

We also recognize that there are major challenges that our customers and consumers are facing around the world.

So, we've got a heightened emphasis on creating flexibility for the Company as we look forward and in doing so, we hope that will not only give us better performance as we move into future years, but also perhaps identify some special opportunities for the Company.

Appreciate your joining us and now we're all going to get back to work.

Thank you.

Thank you for your participation in today's conference call.

This concludes the presentation.

You may now disconnect.