萬事達 (MA) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 MasterCard earnings conference call.

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

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

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms.

Barbara Gasper, Group Executive of Investor Relations.

Please proceed.

Thank you Noelia.

Good morning, and thank you all for joining us today, either by phone or webcast, for a discussion about our first quarter 2009 financial results.

With me on the call this morning are Bob Selander, President and Chief Executive Officer, Martina Hund-Mejean, our Chief Financial Office, and Melissa [Ballinger], our Corporate Controller.

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

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

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

A replay of this call will be posted on our website for one week until May 9.

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 filing.

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

Bob?

Thanks, Barbara, and good morning everyone.

Despite the economic realities that we fact today, this has been a solid quarter for MasterCard.

Our volumes have been impacted by significant headwinds, such as slower cross-border travel, lower gas prices, and an appreciating dollar.

But our business model remains resilient, as we continue to benefit from the secular shift of cash and check to electronic payments.

Our focus remains on ensuring that MasterCard is well-positioned for long-term growth.

Our resources and operations are aligned to support our customers, as they look to reprioritize their business strategies, and we are prepared to take advantage of any opportunities as they arise.

While our net revenues for the quarter declined 2.2% on an as-reported basis, net revenue grew 1.8% on a constant currency basis.

In light of the softening top line contribution, I am pleased to report we have taken considerable cost reduction actions, to deliver a strong operating margin of 48.6%, an improvement of 5 percentage points over the first quarter of 2008, and the highest quarterly margin to date that we have recorded as a public company.

Now if you could just turn to slide two, let me spend a couple of moments on the economic situation, and a little bit on business update.

As I stated before, we don't believe there is any reason to assume the economic slowdown across the world will improve for the balance of this year.

However, our business model and global diversity continue to provide a good degree of resilience, as we navigate through the current environment.

As we look at a number of economic indicators important to our business, we still face challenges around unemployment, retail sales, and the state of the travel industry.

The US official unemployment rate increased in March versus February of this year to 8.5%.

And it is reasonable to think that this trend will likely not plateau until some time in 2010.

It is going to take a while for the economic Stimulus to make an impact on the wider US economy, and restore confidence for both business and consumer spending, to return to rates of growth again.

Likewise, the unemployment rate in the Euro area reached 8.5% through the end of February.

We expect this number to rise over the remainder of the year before stabilizing.

Turning to the latest MasterCard spending pulse data for the US retail sector, in general, the year-over-year comparisons continue to show large declines, but the pace of the contraction appears to be stabilizing.

Total retail sales, excluding autos and gasoline showed a year-over-year decline of 2.5% in March.

This is fairly comparable to the 2.3% decline in February.

However, certain industries contracted significantly, with furniture and furnishings down almost 24%, electronics and appliances down 27%, and apparel down 23%.

In addition, some of the industry figures are negatively impacted by bankruptcies and store closings, such as Circuit City, in the electronics and appliance category, and Linens 'n Things, in the furniture and furnishings sector.

US travel is continuing to deteriorate with historically low year-over-year comparisons in airlines and lodging.

US Airlines posted their third consecutive double-digit sales decline, decreasing by 17.4%.

IATA, the International Air Transport Association, has noted that while global passenger travel has fallen less precipitously compared to freight and shipments, it expects passenger volumes to be down 5.7% for the year.

While the rate of decline in airline sales has slowed, lodging continued to deteriorate and was down 23% in March versus a year ago.

Gasoline sales are down significantly due entirely to the 40% year-over-year decline in gas prices, but pumping is recovering to show consistent year-over-year gains for the past two months.

There are some bright spots.

The Conference Board reported earlier this week that US consumer confidence jumped from 26.9 in March to 39.2 in April, which is a higher gain than economists were forecasting.

Central bankers continue to respond to the crisis, by injecting liquidity to ease credit and monetary conditions.

Finally, many governments continue to provide various forms of stimulus into their economies and their banking systems.

We think this is an important foundation upon which consumer confidence will be built in future quarters.

Turning to some of our most recent business trends, when we look at MasterCard processed volumes and transactions through the first four weeks of April, we saw the following.

Cross-border volumes reversed the declining trend we saw in the fist three months of this year, and stabilized at about flat.

Clearly it is too early to estimate what impact the current flu crisis could have on cross-border travel.

Going back to early 2003, there was an impact on our Asia Pacific business from SARS for a period of about six to eight weeks.

However, SARS had no material impact on MasterCard's overall financials.

US processed volume continued to decline at a slightly higher rate than what we saw in the first quarter, which we believe is primarily due to current lower gas prices, relative to April of last year.

We need a few more weeks of data to better assess whether there are consistent underlying signs of stabilization.

Processed volumes for the rest of the world are still growing, albeit at a lower rate than in the first quarter.

Processed transactions continue to grow in the 7 to 8% range, a slightly faster pace compared to the first quarter of 2009, driven by more transactions in the United States, relative to what we saw in the first quarter.

Moving onto the regulatory front.

As many of you are aware, we reached an interim arrangement with the European Commission about a month ago, regarding our intraregional cross-border consumer interchange fees for the European economic area.

We are pleased that the Commission has recognized the legitimacy of interchange fees and open four-party payment systems, but we still consider these levels of interchange too low.

As you know, cross-border transactions count for less than 5% of our European volumes.

We are continuing our appeal in the Court of First Instance against the Commission's December 2007 decision.

This interim arrangement creates more clarity for the market and for SAPA, allowing us to focus on our customers, and to continue to provide solutions that benefit the millions of European cardholders and merchants, who rely on our products and services.

As they have publicly indicated, we expect the Commission will ensure a level playing field for all four-party payment operators across the European payments market.

I will now turn the call over to Martina for a detailed update on our financial results and operational metrics.

Martina?

Thanks, Bob.

Good morning, everyone.

Let me begin on page three of the deck.

As Bob mentioned, we delivered another solid quarter, despite considerable headwinds.

First quarter net revenues of 1.2 billion, declined 2.2% over the comparable period last year.

This decline was primarily driven by the unfavorable impact of foreign exchange, and higher rebates and incentives, partially offset by pricing, increased processed transactions, and increases in other payment-related services.

Adjusting for the exchange fluctuations of the Euro and the Brazilian Real against the dollar of 4 percentage points, net revenue grew 1.8% for the quarter on a constant currency basis.

The real bright spot is the work that we have been doing on operating expenses, which decreased 10.8% for the quarter.

Foreign exchange contributed 2.9 percentage points to the decline.

Our operating income was 561 million.

While the slowdown of both the financial markets and global economy have impacted our top-line growth, we are seeing the results of our cost containment initiatives in the quarter, resulting in MasterCard achieving a strong quarterly operating margin of 48.6%.

This represents a 5 percentage point improvement over last year's first quarter.

During the first quarter of 2009, we delivered net income of $360 million,(Sic-see press release) or $2.80 per diluted share.

You might recall that during the first quarter of 2008, the Company recorded gains from the sale of our remaining investment in Redecard, which accounted for $56 million in net income, or $0.42 of EPS.

Without the impact of Redecard, and excluding special items, first quarter 2008 EPS was $2.58 per share.

Therefore, on a constant currency basis, excluding the impact of both Redecard and special items, we actually delivered net income growth of 13.8% versus last year's first quarter.

I also like to point out as we discussed in our last 10-K filing, the Company has applied the requirement of a new FASB provision, related to unvested share-based payment awards effective with the beginning of 2009.

This has resulted in minor retroactive adjustments of earnings per share for prior periods, which you may want to take into account for modeling purposes.

Turning to page 4.

During the first quarter, the global diversification of our business continue to help us weather the cyclical downturn in the US, where the year-over-year decline in a number of our business drivers is most evident.

Our business continues to generate healthy transactions and volumes on a local currency basis, from economies outside of the United States.

And the secular shift from cash, electronic payment forms continues to provide strong growth opportunities, as we see worldwide processed transactions, and new card issuances increasing.

Worldwide gross dollar volume, or GDV, was essentially flat at 0.3% on a local currency basis in the first quarter, and declined 9.7% on a US dollar converted basis to $550 billion.

The deceleration in the overall local currency growth rate can be attributed to the US, where GDV growth declined 8%, due to a double-digit decline in credit.

Across all other regions, GDV continued to grow by 7.7% on a local currency basis.

However, that is a much slower pace than what we have seen either on a year-over-year or sequential basis.

GDV growth rates outside of the US are lower on a US dollar basis, due to the strength of the US dollar against most other currencies during the first quarter.

Worldwide debit GDV grew 10.7% for the quarter.

This compares to about 17.8% growth in worldwide debit in the first quarter of last year, but it is more in-line with the growth on the sequential basis.

In the US, debit GDV volume grew at 5.6%.

On a local currency basis, worldwide purchase volume was also relatively flat at 0.3%, similar to the GDV trend, US purchased volume declined 7.1% for the quarter, driven by a declining credit volume.

The decline in gas prices on a year-over-year basis accounted for approximately 40% of the decline in US purchased volumes.

Gross dollar volumes were down 0.7% on a local currency basis, or approximately 14% on a US dollar converted basis.

This was primarily driven by declines in the mid-teens for US cross-border volumes.

We saw a deceleration of growth in every other region, but only in Latin America did we see volumes decline.

Globally, cross-border transactions continue to grow in the mid-single digits for the quarter.

Specifically for the US, while cross-border volumes declined, transaction growth was flat.

From an acquiring perspective, travelers coming to the US did spend less compared to the same period last year.

Looking now to processed transactions, they increased 5.8% compared with the year ago quarter to 5.1 billion in the first quarter.

In the US and Europe, processed transactions grew at a mid-single digit rate, on both a sequential and year-over-year basis.

In Asia Pacific/Middle East/Africa, and the Latin American and Caribbean regions, processed transactions grew at double-digit rates.

The number of MasterCard branded cards worldwide grew 4% to 967 million in the quarter, and excluding the US, the rest of the world card issuance grew 12.1%.

The majority of this growth was principally driven by issuance of MasterCard debit and prepaid cards.

As of March 31, 2009, there are approximately 1.6 billion MasterCard and Maestro branded cards issued.

Now let's turn to page five.

Early in April, we announced that we were modifying our external presentation of our major revenue categories, to better align with how management views the drivers of our business.

Beginning this quarter, we are reporting four major growth revenue categories.

Domestic assessments, cross border volume fees, transaction processing fees, and other revenues.

We are also reporting one combined contra revenue line for all rebates and incentives.

Historical information regarding the modified presentation of revenues is available on the IR section of mastercard.com.

As we mentioned before, net revenue declined 2.2% on an as-reported basis, but grew 1.8% on a constant currency basis.

Pricing contributed 4 percentage points to net revenue.

Domestic assessments decreased 2.1% from the prior year, primarily due to the impact of converting local currency volumes to the strengthening functional currencies, which are used to calculate revenues.

This was evidenced by GDV growth being flat on a local currency basis, but declining 9.7% on a US dollar basis compared to the prior year's period.

New pricing introduced in Europe in October 2008 partially offset the decrease.

Cross-border volume fees decreased by 11.3% versus Q1 '08.

While cross-border volumes were essentially flat on a local currency basis, they declined by 14% on a US dollar basis, which impacted this revenue line.

Increased European pricing partially offset the decrease.

Transaction processing fees increased 7.1% compared to the prior period, primarily due to a 5.8% increase in processed transactions, and other revenues, such as foreign exchange gains on settlement activities.

This increase was partially offset by foreign exchange translation.

Other revenues increased 11.6% due to the increased user-pay fees, such as our concierge cardholder services.

While there was some tempering in rebates and incentives due to lower volumes, this line item increased 6.6%, primarily as a result of new and renewed deals, as well as the favorable impact on rebates and incentives in the first quarter of last year, when certain customer incentives were not paid out, as a result of performance hurdles not being met.

Now we will turn to page 6 for some detail on expenses.

We continued implementing a number of expense management measures, as part of our commitment to a flat expense structure this year.

During the first quarter, total operating expenses decreased 10.8%, despite taking a $19 million severance charge.

Currency fluctuations of 2.9 percentage points contributed to the decline, therefore total operating expenses decreased 7.9% on a constant currency basis.

The decrease was mainly driven by the following.

General and administrative expenses decreased 3%, with currency fluctuations representing approximately 2.6 percentage points.

On a constant currency basis, G&A decreased 0.4%.

The decrease was due to the following.

Travel expenses decreased approximately 64%, or $16 million on a year-over-year basis, as a result of continuing cost reduction initiatives.

And professional fees declined by approximately 39%, or $20 million during the quarter, due to a significant reduction, and legal costs and consulting expenses.

Personnel costs for the quarter grew 1%, due to a $19 million severance charge.

Excluding the severance charges, personnel costs declined 5.1%.

Now let's turn to advertising and marketing spend, which decreased by 35.4% versus the year ago quarter.

As core marketing activities, price less advertising, and other media investments were scaled back in response to current market conditions, and in keeping with our overall cost containment efforts.

Additionally, MasterCard was able to take advantage of reduced media rates in certain countries.

At the same time, the often-obtained more permanent placement and coverage over the quarter.

Approximately 3 percentage points of the decline related to the impact of foreign currency fluctuations.

Let's move to the cash flow statement and balance sheet highlights on page 7.

We generated $416 million in cash from operations, and ended the quarter with cash and cash equivalent and current investments of $2.3 billion.

During the quarter, MasterCard acquired a 33% interest in a joint venture with Accor in France, which will augment our private label prepaid capabilities.

We also increased our investment and strategic payment services in an Australian processing entity.

We now hold a controlling interest in this entity.

Turning to page 8.

The economic slowdown around the world continues to prove challenging, for both us and our customers, and we see no reason to change our short-term view of no improvement until 2010.

From a revenue standpoint in 2009, we expect to fall below our minimum average annual growth rate performance objective of 12% on a constant currency basis, due to lower volume growth.

As you know, as part of our interim arrangement with the European Commission, some of the European pricing actions that took place in October 2008, representing about half of this quarter's pricing contributions to net revenue, will be repealed on July 1st, and will impact both the growth assessment and cross-border volume revenue lines.

With this repeal and other pricing actions implemented in April, we currently expect to see at least 400 basis points in top line growth coming from pricing this year.

Given the relative weakness on the top line, we have increased our scrutiny around managing expenses even more tightly.

Looking at full year 2009, we now expect to deliver flat to slightly down total operating expenses, even when factoring in all potential severance charges for 2009.

We have not yet completed all of our work around right-sizing following our reorganization back in January.

So while we are not able to give you a total anticipated amount of severance for the full year, we do expect to record additional severance charges, well in excess of the $19 million that we took in the first quarter.

We also expect the quarterly rate of depreciation to tick up slightly from the $31 million level we saw in Q1.

With respect to A&M spend, advertising and marketing spend, we expect full year 2009 to fall below full year 2008, on both an as reported and constant currency basis.

In terms of this year's quarterly cadence of the spend, I would expect all three remaining quarters to be significantly higher than the 116 million we recorded in Q1 for advertising and marketing expenses.

We will continue to evaluate whether to make further adjustments to our expense structure, keeping in mind our intention to invest wisely to protect future growth opportunities.

We remain committed to our longer term performance objectives, and do not intend to jeopardize them in order to deliver short-term results.

I will now hand it back to Bob, to share some recent business highlights.

Bob?

Before moving to the Q&A session, let me share a couple of recent business highlights from around the world.

Under difficult economic conditions, we condition to readjust our plans, and make sure we are aligned to meet the changing needs of our customers.

As evidenced through the new agreements and partnerships we entered, our customers recognize us as an important partner, and we are committed to delivering real value that will help them optimize their payments business.

As we mentioned last quarter, MasterCard Integrated Processing Solutions, or IPS, the debit and prepaid processing platform we introduced last year, continues to build momentum.

Just this morning, we announced a deal strengthening our partnership with Travelex, the world's largest distributor of foreign currency prepaid cards.

This new global processing and brand agreement is significant, as it underscores the value of our IPS platform and the strength of our prepaid expertise and global brand.

In the US, we signed a multi-year signature debit contract extension with Fifth Third Bank, to continue our brand relationship.

Fifth Third, a MasterCard issuer for more than 25 years, will continue to issue consumer and small business debit MasterCard cards, as well as consumer, small business, and commercial MasterCard credit cards.

Solidifying our long-standing relationship with Bank of the West, we signed two multi-year contracts that extend our commercial credit and consumer and small business credit relationships with the bank.

In early March, Orange and Barclaycard announced the launch of new co-branded products and services, including a range of mobile offerings, where their customers will be able to use their mobile phones to pay for goods and services using contactless technology.

We are very pleased that MasterCard will provide the payment capabilities for the transactions.

In addition to supporting Orange and Barclaycard with mobile payment capabilities, there are a couple of other innovative products and solutions worth noting, including the launch of the MasterCard ATM hunter, the first in a series of applications we are developing specifically for Apple for their iPhone and iPod Touch.

Together with Blaze Mobile, we introduced the blaze Mobile MasterCard PayPass mobile payment sticker, enabling any mobile device to be used for tap and go purchases.

This innovation has been noted by the Contactless Intelligence Industry Group, as a type of development that may be a way to encourage movement toward large-scale near field communications implementations.

In partnership with CitiCards Canada and Bell Mobility, in April we announced the completion of the first near-field communications trial of mobile PayPass in Canada.

This was the first trial in Canada to use Bell Mobility's cell phone infrastructure, allowing participants to make purchases using their mobile device at MasterCard PayPass acceptance locations across Canada.

Finally, earlier in the quarter, we announced that we had issued more than 50 million PayPass devices globally.

As of March 31, there are nearly 55 million PayPass cards and devices, usable at more than 146,000 merchant locations worldwide.

In summary, whether it is through the innovative products and solutions we offer, or our unmatched advisory and information services, for making payments easier and more efficient for everyone involved.

I will now turn the call back to Barbara, so we can begin taking your questions.

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

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

Noelia, can we please start the Q&A session?

Ladies and gentlemen, (Operator Instructions).

Questions will be taken in the order received.

As a reminder, out of courtesy to all participants, please limit yourself to one question and one follow-up.

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

Hi.

Thanks for taking my question.

Can you talk a little about the trends you are seeing in assessments?

Martina, I know you mentioned they were a little bit high this quarter.

The rebates were a little bit higher than you would have anticipated.

Is there new business that you have won which contributes to volume as the year goes on, or are we going see a bit of a lag, by which those rebates start to moderate with the declines in volume we have been seeing?

Hi, Andrew.

As we have talked a number of times about it, that is probably one of the line items that is more difficult to really forecast.

Obviously with where the volume trend is, you typically would see some moderating, but not on a one for one basis on the rebates and the incentives line, but we happen to have actually a very good trajectory from a business point of view, and we are, as you heard this morning, are assigning new deals, and we also are obviously renewing some business.

And that will be a countervailing effect, because you obviously have to take whatever we are doing there on rebates and incentives into account in our financials.

So net/net, Andrew, I think this is probably one of the more difficult lines to call.

Okay.

But it sounds like you feel pretty good about your share position as a consequence to some new business signings?

Andrew, that is really not how we're looking at it.

Share is just one input, but really what is important to us is to sign profitable business.

That is what we are most interested in.

Then just to clarify on pricing, it sounds like the 4% gain from pricing this year is a little bit better than what you had been contemplating around your 2% long-term goals.

Is that a little bit of a step-up in expectations?

That is true.

As we got our hands around some of the pricing actions that we are putting into the market, we feel more comfortable that this would be a good zip code for the rest of the year, the at least 400 basis points.

I just want to remind everybody, that I would not be expecting that kind of number going forward.

I think in general, we would be pulling back to a normal steady state basis, we should be seeing about 200 basis point contribution to our net revenues.

Terrific.

Thank you very much.

Your next question comes from the line of Moshe Katri, Cowen and Company.

Thanks.

Can you comment on EPS growth for '09, I think you made some commentary on that in previous quarters?

Looking at credit card usage, given the trends impacting this area, can you touch base on the recent changes in consumer behavior in terms of using credit cards?

Are consumers still using credit cards for large purchases, et cetera?

Thanks?

Hi, Moshe.

First of all, we don't really talk in terms of EPS growth, we are talking in terms net income growth.

As you have just seen for our first quarter, if you exclude the special item that we had in the first quarter of '08, if you exclude the Redecard proceeds or gains that we had in the first quarter '08, and if you adjust on a constant currency basis, our net income growth was 13.8%, and that is obviously below our 20 to 30% long-term performance objective, that we had laid out some time ago, albeit for 2009 we said that we will be likely coming in lower than that.

If you tell me where the economy is going to go, I probably can tell you a little bit more, in terms of what our expectations would be, but I would think that the first quarter, and how we were able to navigate through what is happening on the top line versus what we were able to do from an operating expense and margin point of view.

That is probably a pretty good analogous, in order to extrapolate to how we might go through the rest of the year.

But it very much depends on how the economy, not only in the US, but also in the rest of the world, will be performing.

And the second question about credit card usage?

Yes, Moshe, let me make a couple of comments there, if you take a look at the quarter, we were in terms of the credit and charge programs, purchase volume in the US was down nearly 14%.

And in the rest of the world, purchase volume grew a little over 7%.

So clearly, the impact we are seeing in the US is much more dramatic thus far than we are seeing in the rest of the world.

I think if you take a look at the stage we are in the cycle, you take a look at some of the issuer reports that have come out in the first quarter, we have seen a slowdown in acquisition programs.

We have seen increases in delinquencies and of course in charge-offs.

Virtually all of our issuers were reporting similar levels of reductions year-over-year, in terms of the purchase volumes on their US card base.

So I think what we are seeing is the reality of what is going on in the economy play through our numbers.

Having said that, if you look at the various categories that I mentioned, in terms of the first few weeks of April, we haven't seen a turnaround in the US volumes during the month of April.

What we have seen is transactions continue to grow year-over-year.

I am not talking about total MasterCard.

I don't have at my fingertips the mix of debit and credit, but total transactions do continue to grow.

We are looking forward obviously to seeing the Stimulus begin to have some impact later in the year.

That is probably the earliest we will be able to tell you a little bit more about what is going to happen, in terms of the performance on credit, as compared with credit and debit combined.

Thank you.

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

Good morning everybody.

I had a question on your comment regarding April being worse than the just reported quarter, that seems to be in contradiction to what your largest competitor said the other day, where they had cited that April was an improvement over the March quarter, with credit remaining stable, in terms of the downturn year-on-year.

I was wondering if you could give us a little more detail around your April comments?

I don't have a lot more detail than what I have already shared, Craig.

From the standpoint of cross-border, that was flat, pretty much with what we had seen in the first quarter.

Again, we don't know what impact, if any, we will see in the rest of this quarter as a result of what is happening with the flu.

The US volumes I mentioned in April continue to decline year-over-year.

The decline was slightly higher than what we had seen in the first quarter but I did caveat that, with the dramatic change in the price of gasoline in the US, where it is down about 40% year-over-year for the comparable period last April.

If I recall correctly, gas is about, I don't know, 6% of our volumes, and I think it is about 15% of our transactions.

The rest of the world also was showing slower growth in the first quarter in terms of volume.

First quarter was about a little over 8% purchased volume growth, so we have seen a slight slowdown from that.

On the other hand, in total, the processed transactions that we have seen are up.

So what we see is people continuing to use it, but if your average ticket size continues to come down.

So transaction growth was up 7 to 8%.

To a degree, those are the shoots of spring starting to poke through, because that is up from the 5.8% in the first quarter.

We think it is too early to call it spring.

We are waiting for how things play out over the next several weeks.

Okay.

Just one follow-up.

Regarding Europe, SEPA, and everything going there, it seemed to me that if one assumes the US is cyclical, the real focus for MasterCard, and big opportunities should be focusing to Europe as the year moves on.

With the economic conditions what they are in Europe, and the likelihood that Europe has a more prolonged downturn than the US, and with the EC mandating specific items in their recent release, that would require the banks in Europe to implement new IT systems, it would seem there is a lot of motivation to not invest in something like Monet right now, and new IT systems.

My question is do the current conditions, would you believe the current conditions provide additional incentive with SEPA deadlines looming for European banks who own local processing schemes, to view MasterCard more favorably as the SEPA-compliance solution, considering the Maestro penetration in the countries within the EU?

Craig, would you like to come and help sell with us?

That was a good pitch.

Thank you.

Does it pay better than what I am doing now?

(laughter).

Just a couple of thoughts.

Europe is struggling as well.

I mentioned the unemployment data there.

The most recent data was the February data where it was 8.5% similar to what we are seeing in the US for March.

It ranges, I guess Spain is up in the 17% range, and they are talking about it hitting 20% over the course of this year.

So Europe is struggling economically, and many of their financial institutions have significant challenges with regards to capital.

They are going through the same things that are happening with our customers here in the US.

So I don't really bifurcate the US and Europe.

I sort of look at the same things playing out, perhaps on a slightly different timetable.

So I am not optimistic that Europe is going to be a lot better in the next quarter, whereas I think perhaps by early 2010, the US will be, it is not clear on Europe.

Specifically on SEPA and the European Commission, I mentioned in my comments that we had, what is the phrase, I guess we reached an interim agreement, or a cease-fire with the European Commission, which recognizes the principal of interchange.

We hope that provides a little more comfort to the financial institutions of how the regulators are going to approach this, so that they don't sit there with the thought, well, interchange, which is a fundamental balancing mechanism that is essential for the development, and continued strength and growth of the payment system.

They don't have to worry as much about that principle being challenged anymore.

That was one of the reasons we thought that was an important to reach.

You put those two things together, and I think the second one gives a little more comfort and incentive.

On the other hand, the economic environment continues to challenge customers, and they are pacing their investments in everything, whether it is their IT systems, or their marketing program.

They are doing the same kinds of things we see institutions doing here in the US.

So I think that is going to continue to drag things out a little bit, and it also does, I think to your point, make it a lot easier for them to take what they already have on 300-plus million cards in Europe.

The Maestro brand, and treat that as the solution to ensuring that they are SEPA-compliant and competitively positioned favorably with their other financial institutions, with whom they compete for consumer and merchant business.

Thank you.

Your next question comes from the line of Anurag Rana, KeyBanc Capital Markets.

Good morning, everyone.

Bob, any update in Europe as it relates to countries looking at interchange because of what the decision that was taken was on cross bordered?

Well, Anurag, many of the domestic regulators are looking at interchange.

What we have tried to do, and I think most financial institutions have tried to do with their domestic regulators, is to say, hey, why don't you wait until this European Commission appeal plays through in the Court of First Instance?

If you do look at what has happened over the last several years, the two regulatory decisions that were challenged in the Courts, both were reversed, and both were reversed in favor of financial institutions and the principal of interchange.

I am referring both to the Office of Fair Trading in the UK, where the competition tribunal reversed their decision, and also more recently, late last year in Poland, where a Polish Court threw out the competition authority, ruling against interchange in Poland.

So we can't confirm this will happen, but what we are encouraging domestic regulators, and so are our financial institution colleagues, encouraging the regulators, is hold on a second.

The decisions that have been taken along very similar lines of principal by two domestic regulators have been overturned in the Courts, and it is not clear how this interim agreement will fare, once it does get to the Court, as MasterCard continues it's appeal in the Court of First Instance.

Thank you.

And as a follow-up, Martina, you mentioned that operating expenses would be flat to slightly down.

They were down about 11% in the first quarter, so it just seems a bit conservative given that the amount of reduction we have seen in ad and marketing in the first quarter, we shouldn't expect a little higher, the reduction in operating expenses for the full year?

Well, Anurag, in particular for advertising and marketing, for the first quarter it was principally a number of $116 million, and you can just take what we spent on A&M last year, obviously those numbers would be down, but nevertheless for the next three quarters, you can expect that advertising and marketing expenses will be significantly higher than the first quarter.

So that is one of the things that you have to take into account.

When you look at the General & Administrative line, yes, it's down, but what we are saying, and that is a change from before, is that we will be basically as part of the whole operating expense reduction, we will be able to basically cover any of the potential future severance expenses that we are still expecting that we are going to have coming through the P&L.

So I think you have one covering of the severance expenses, two, we might be slightly down.

I think when you put all that together, and in terms of seeing how we try to really work between the top line and the bottom line in the first quarter, I think that gives you probably a pretty good road map for the rest of the year.

Thank you.

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

Hi, thanks, this is Tien-Tsin.

First, I just want to ask about cross-border, the flat local volume growth that I heard was basically in-line with our view.

But we significantly underestimated the FX impact.

Martina, can you give us some help in the currency mix here, or rule of thumb on major currencies we need to translate for this revenue line item?

Well Tien-tsin, that is really hard to give a rule of thumb for that one, but as you can appreciate, we are pretty much exposed to almost all currencies in the world, and our major functional currencies are the US dollar, the Euro, as well as the Brazilian Real of course.

Most of our revenues that we charge locally are charged on a local currency basis, and then converted versus the functional currencies.

So as you see, the movement of those currencies versus the US dollar, as well as versus the Euro, that is just a major impact.

We did feel, the impact was not as large in prior quarters, but for this quarter, it was significantly large.

That is why you are seeing, I think, for the first time ever, to quote a cross-border number on a US dollar basis, and not only on a local currency basis.

Otherwise you would probably not be able to really explain what is going on in the cross-border volume fee line item that is running through our revenues.

Yes.

I guess we should assume this same kind of path assuming no change obviously, unless we have seen another mix within the quarter.

Is that fair to assume?

Yes.

I mean, mix plays in a little bit from time to time.

Let me just in terms of overall revenues, if I can just pull you back to the P&L, so net revenue impact.

If we were to stay at current rates like at the average rates that we had for the first quarter, you saw that we had a 4 percentage point impact on that revenue, and that is pretty much what you would expect for the rest of the year as a headwind.

Assuming we have those rates stabilizing at those levels.

Okay.

Just as a follow-up on the expense side, what kind of savings do you expect from the severance actions taken in the quarter, and also just as a follow-up on the question on ad and marketing, with AmEx spending down over 40%, Visa was down 9, you guys down 35, can we expect ad and marketing spending to be comfortably down in double-digits for the rest of the year assuming no change in the environment?

I am just going to comment on the ad and marketing, and let Martina pick up on the other point.

In terms of the ad and marketing, obviously, we are looking forward to seeing the economy and some things begin to improve.

As I have mentioned, I don't think that is happening as we sit here.

We can say that is happening in the second quarter.

But we certainly would expect with the Stimulus, and the amount of money particularly in the US, but in other markets around the world, that that is going to start to work its way in the second half.

As that happens, we have I think, got adequate advertising and marketing capacity in our thinking to be able to respond to that.

And as Martina mentioned, we would expect that this would be a low point for the year this first quarter, and that we would see a significant growth in marketing spending moving through the rest of the year.

Now if we don't see that recovery happening, then that would clearly temper and cause us to rethink, whether or not we want to make those investments or not.

Many of those are being done with customers to the extent customers say no, I don't want to do a particular promotion, then obviously, we are not going to do that.

But right now, there is a level of expectation on our part, that as things get better, we will be increasing our marketing spend.

We have benefited, as have all other advertisers and marketers, from reductions in the costs.

So we are getting more bang for our buck.

As things snap back, we expect those other advertisers to return.

That may not be the case as it is in many of the markets around the world.

Although in a couple of markets, media costs are actually up year-over-year.

I hope that helps on the ad and marketing.

When you say up, you mean relative to Q1, right, Bob?

Yes.

Sorry, Martina, with you are saying about the severance actions, and the savings expected?

Just on the severance actions, and I am only going to comment for the first quarter related to the $19 million.

When you calculate the payback period on that it is just shy of two years.

So given that we did the actions in the first quarter, and then you have a two-year payback, that probably gives you pretty much a good zip code for what you can model.

I am not going to comment on what we might be doing in the future, simply because we are still working on, how exactly that will look like, and as soon as we can comment on it, we will of course.

Great.

Thanks for the details.

Your next question comes from the line of James Kissane of Bank of America-Merrill Lynch.

Bob, just following up on Tien-tsin's question around advertising and marketing, in a normal environment, what do you think the right level is, maybe as a percentage of revenue based on your sense of returns on advertising and marketing?

Thanks.

James, we don't use a what should I call it, a mindless ratio of 30%, or whatever of revenue is what your advertising and marketing should be.

It will vary from market to market.

It depends on the state of our brand in a given market.

If we have been there for years, and have high awareness and we have good advertising recall, and positive consumer and merchant sentiment towards the brand, then you wouldn't need to invest as much in a similar market that didn't have those things, in order to establish yourself.

So when we are looking at our marketing spend, we are looking across all of the markets that we operate in the world.

We are also looking at more than just media, we are looking and promotional and sponsorships.

Most of our sponsorship deals, are deals that have been signed for multiple years.

Those are fixed in the short run from a cost and spending standpoint.

The variability is principally in the media area, and to the degree that there are the utilization of sponsorships through promotions, that also provides another dimension of variability.

As we see things improve, we want to take advantage of those opportunities, and it will vary market by market and customer by customer, as to when and how that happens, but we anticipate with the recovering economy and consumer spending, we are going to want to go in there and promote our brand and product, and it will vary as a percentage of revenues, depending on the stage of the development, and the nature of the opportunity in each individual market.

And Bob, just given some of the consolidation in the issuer market, when would you expect a resolution of some of the portfolios or contracts in play, for example, WaMu, would you think that is an '09 event?

Yes, I expect that is an '09 event.

There are various agreements that come up, both here in the US and other parts of the world, and in the course of the next year, and our customers, as we do, we like to get those things lined up, in anticipation of let's say the current agreement ends at the end of this year.

We will be working with our customer to try to get those things aligned in the course of the summer in the third quarter, so that we are not all sitting around on New Year's Eve wondering what is going to happen.

That is normal business as usual practice.

When we know something about a particular deal and the customer has agreed, we will share it with you, much the same way as we have shared this morning, reminding you about the Fifth Third deal, and I guess we released the information about Travelex, which was signed this morning as well.

That is great, thank you.

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

Thank you.

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

Thanks for squeezing me in here, I appreciate it.

Last quarter I believe you guys said, that you needed high-single digit constant currency revenue growth, to get to the 20 to 30% net income target, specifically for '09 unless you were to take some additional cost actions.

Can you just update us on that construct?

I know you are not providing point guidance for '09 per se, but just your thought process around those relationships between top line growth and net income growth?

And also as part of that, clarify whether that 20 to 30% includes or excludes severance?

Jason, our long-term performance objectives are 20 to 30% net income growth, always excluded severance, okay, that means we never had that in there.

And when we actually made the comment for 2009 in terms of that we would have to be in high-single digit net revenue growth, in order to produce the bottom line objective, that was assuming that our operating expenses were flat.

Again that did not include any potential severance charges.

So now to the extent that we can obviously cover the severance charges within that flat operating expenses, and if to the extent, we actually come in below flat, or lower than flat on operating expenses, of course you would have probably reduced your high-single digits metric for net revenues a tad.

You can throttle back and forth and do the numbers, given that we gave you quite a bit to model it, but that would be the natural conclusion.

Okay.

So the number that you gave for the quarter, in terms of constant currency net income growth the 13-ish percent I think you mentioned, did that include severance?

Yes, that did.

So what would that be if you excluded the severance since that is an apples-to-apples versus the 20 to 30, correct?

Well it was 19 million of pretax, so you are going to have to take the tax, it was 15 million post tax so that was about --

Another 3 to 4%.

Another 3 to 4%.

Okay.

So you wouldn't have really been too far below the 20 to 30 on an apples-to-apples basis?

Correct.

Okay, thanks for that.

And just of the last one.

A bigger picture questioning, you recognizing unemployment is one of the more important metrics in packing your business.

If we are still three to four quarter away from seeing unemployment peaking, does that mean from your guys perspective, credit and debit volume trends probably haven't troughed yet, or should we not necessarily draw that conclusion, since the year-over-year comps do start to get easier in the second quarter going forward?

First, on your last comment, I am not sure that the comparisons get easier in the second quarter.

I think the comparisons will only really get easier in the fourth quarter.

Because if you go back and you look, things were going along pretty well, at least from a consumer standpoint, and then that week in September, when we had Lehman, AIG , et cetera, which was roughly mid-month, the 15th of September, that is when we started to see like a wake-up call to the consumer, hey there is something going on here, and we started to see the year-over-year deterioration in growth occur in the fourth quarter.

So I think the comparables will be easier, Jason, in the fourth quarter rather than the second or third.

From the standpoint of unemployment, there are two dimensions here.

There is unemployment, and there is spending.

Clearly, as people lose jobs, they are less able to spend.

I have no reason to believe that the economic, or economists who have suggested that unemployment will continue to rise through the first quarter and get up to circa 10%, I have no reason not to believe that is likely to happen, based on any of the other indicators I am seeing.

So that is a downward impact.

On the other hand, the Stimulus, and some beginning improvement to consumer confidence, and the stability we have seen in pricing, or prices, I should say, particularly down in the commodities area still.

Gasoline is a great example of that one.

That will encourage some spending, we expect, as we proceed into the year.

We would look to see that spending offset, if you will, and the unemployment impact over the course of the next couple of quarters, or at least we hope it would.

Then we get a better comparable for the

Okay.

So I guess bottom line, a little too soon to say if volume metrics have troughed yet?

I think that is exactly how I would summarize it.

Thanks.

I look forward to seeing you at the Analyst Meeting.

Thank you.

I think that is it.

I think we are done.

Barbara, let me make a couple of comments in summary here that despite the current economic realities, we delivered a solid first quarter.

The current market environment has led to some softening on our revenue line, but we have taken considerable cost reduction actions, to deliver a strong operating margin.

We will continue to position ourselves to ride out these challenging times, and remain focused on ensuring that we are well-positioned for longer-term growth.

I look forward to sharing more of our thinking at our upcoming investment community event on May 13th.

Thanks for your time today, everybody.

Thank you for your participation in today's conference.

This concludes your presentation, and you may now disconnect.

Have a great day.