萬事達 (MA) 2009 Q2 法說會逐字稿

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

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

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

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

(Operator Instructions)

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

Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you, Francine.

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

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

Following comments by Bob and Martina highlighting some key points about the quarter, we'll open up the call for 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 on our website at mastercard.com.

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

A replay of the call will be posted on our website for one week until August 7.

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 will now turn the call over to Bob Selander.

Bob?

Thanks, Barbara, and good morning, everyone.

I would like to start out by saying that I'm very pleased with our strong second quarter financial performance.

We saw net revenue growth of 2.7% on an as reported basis and on a constant currency basis, net revenue growth was 7%.

We have continued to follow an aggressive and thoughtful approach to cost management with total operating expenses declining 13% this quarter, excluding the impact of last year's litigation settlement, and we have delivered a 10.2 percentage point operating margin improvement over the same quarter last year.

I'm equally pleased that net income grew 26.4% on the same adjusted basis.

Though we have been cutting back where we can, we continue to prioritize our resources in support of the best opportunities, making sure that we appropriately invest for the future.

We continue to see the economic downturn affect consumer and business spending.

Our volumes during the quarter were impacted by significant headwinds versus last year, such as an appreciating US dollar, lower gas prices and slower cross-border travel.

As evidenced by our process transaction growth of almost 8%, we are benefiting from the secular shift from cash and checks to electronic payments.

Our business model and global diversification continue to provide a good degree of resilience in this environment.

Turning first to the regulatory and legislative front, we're working closely with our customers, policy makers, regulators and government bodies around the globe to proactively address the issues in local markets.

As most of the questions we have gotten from you have been around what is happening on Capitol Hill, let me focus on interchange related legislation in the US.

While legislation has been introduced, there is no movement on that legislation in either the House or Senate as it is in its earliest stages.

We saw during the last Congress that this legislation is controversial and its proponents face significant political and policy changes in moving it through both chambers, and rightfully so.

So one of the key points that frequently gets lost in this debate is the extraordinary value merchants receive when they accept payment cards.

In addition to the increased revenues that come from card acceptance, our network enables merchants to make sales on credit while shifting all the risk to the financial institutions that issue our cards.

This point is driven home by the recent escalation of bank charge-off rates which now range from 7% to 12% of outstanding balances.

More to the point however, the sheer magnitude of this single benefit is clear which you consider that the average consumer credit charge-off rate as a percentage of point of sale transaction volume is multiples higher than the average consumer credit interchange rate in our system.

For example, looking back to 2008, average interchange rate for MasterCard consumer credit cards was about 1.85%, while credit losses from point of sale transactions, according to information that we gather, were in excess of 4%...

a staggering differential.

In fact, over the past three years, point-of-sale related credit losses have doubled while average interchange rates have been virtually flat.

Again, each and every one of these transactions where a credit loss occurred was a sale for the retailer.

One of the most troubling aspects of the legislation and one of the reasons that it's so controversial is that the result would be that merchants, by no longer paying their fair share for the benefits that they received, would shift these costs to consumers.

US consumers would lose, just like consumers in Australia did when the Reserve Bank of Australia arbitrarily lowered interchange rates there.

Australian consumers now pay more for payment cards and receive fewer benefits with no evidence of lower retail prices to consumers.

Turning now to our thoughts on the economy and the current business trends we're seeing, our assumptions remain unchanged and we don't expect the economic slowdown across the world will improve until sometime next year.

The most recent unemployment figures for both Europe and the US are at 9.5%, and economists expect unemployment to rise for the foreseeable future.

Consumer confidence remains at a low level, probably held down from concerns around unemployment.

We are looking for further stabilization of the US housing sector as one leading indicator that helps consumers feel comfortable about increasing their spending, and there are some encouraging signs.

This week, the Commerce Department released statistics that showed new US home sales rose more than expected in June, helped by a 17% year-over-year fall in housing prices.

The Conference Board's Index of Leading Economic Indicators gained 0.7% in June, exceeding economists' forecasts.

This is the third straight month of increases, suggesting that the recession could be drawing to a close.

Turning to the latest MasterCard SpendingPulse data for the US retail sector in June, the results are fairly consistent with May, indicating generally stable conditions and point to a more stable environment for the second half of this year.

The high-ticket consumer durable sectors such as luxury retailers and department stores are still showing year-over-year sales delines in the 10% to 20% range.

However, retail sales, excluding autos and gas, fell in June versus the prior year by 2.3%, which is similar to what we have seen in prior months.

Our cross-border volumes continue to stabilize across most regions.

While still slightly negative on a worldwide basis, the rate of decline slowed from the 2.1% decline we saw for the second quarter, primarily due to Americans traveling abroad.

In Europe, we saw continued moderation in growth, but it remained positive.

US process volume saw a lower rate of decline through the first four weeks of July, relative to what we saw in the second quarter, which also signals potential signs of stabilization.

Process volumes for the rest of the world are still growing in line with the second quarter.

Process transactions continue to grow in the 8% range, similar to the second quarter of 2009.

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

Martina?

Thanks Bob, and good morning everyone.

Let me begin on page three of the deck where I will focus on the non-GAAP columns which exclude all special items.

As Bob mentioned, we are very pleased to have delivered another solid quarter in spite of continuing headwinds.

Second quarter net revenues grew 2.7% to $1.3 billion over the comparable period last year.

Adjusting for the headwinds from exchange fluctuations of the euro and the Brazilian real against the dollar, net revenue grew 7% for the quarter on a constant currency basis.

This increase was primarily driven by pricing changes of approximately 8 percentage points; an increase in the number of process transactions by 7.9%; and lower rebates and incentives of 5.8%.

These positive factors were somewhat offset by the impact of lower gross dollar volume in the quarter.

We have continued to effectively manage operating expenses, which decreased 13% for the quarter.

Foreign exchange contributed 3.2 percentage points to the decline.

Our operating income was $558 million for the quarter.

While the economic slowdown across the global economy continues to impact our top-line growth, we are generating strong results from our cost containment initiatives and achieved a quarterly operating margin of 43.6%.

This represents a 10.2 percentage point improvement over last year's second quarter.

MasterCard's effective tax rate was 35% in the second quarter of 2009, pretty much on par with the year-ago quarter.

During the second quarter of 2009, we delivered net income of $349 million, or $2.67 per diluted share.

Turning to page four, during the second quarter, the global diversification of our business continued to help us weather the cyclical downturn in the US where the year-over-year decline in the 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 to electronic payment forms continues to provide significant growth opportunities as we saw strong growth in worldwide process transactions.

Worldwide gross dollar volume or GDV was slightly down at 0.6% on a local currency basis in the second quarter, and declined 9.3% on a US dollar-converted basis to $595 billion.

The deceleration in the overall local currency growth rate can be attributed to the US, where GDV growth declined 9.7% due to a double-digit decline in credit volume growth.

Across the rest of the world, GDV continued to grow by 6.8% on a local currency basis, albeit at a much slower pace than what we have seen either last year or last quarter.

Translated into US dollars, the 6.8% growth becomes a 9% decline, due to the strength of the dollar against most other currencies during the quarter.

Worldwide debit GDV grew at 11.1% for the quarter on a local currency basis.

This compares to about 19% growth in the second quarter of last year and is somewhat higher than the first quarter of this year.

In the US, debit GDV grew at 4.1%.

Debit growth for the rest of the world was almost 22%, primarily driven by several countries in the APMEA region.

On a local currency basis, worldwide purchase volume was also slightly down at 0.7%.

Similar to the GDV trend US purchase volume declined 8.8% for the quarter, driven by a decline in credit volumes.

The decline in gas prices on a year-over-year basis accounted for approximately a third of the decline in US purchase volume.

Cross-border volumes declined 2.1% on local currency basis or approximately 14% on US dollar-converted basis in the second quarter.

The decrease was primarily due to Americans spending less on purchases abroad, and decreased travel to and from Mexico.

We continue to see more Europeans traveling within Europe and fewer crossing the Atlantic to the United States.

Globally, cross-border transactions continue to grow in the high single-digits for the quarter on both a year-over-year and a sequential basis.

When we looked at process transactions in the second quarter, the increased 7.9% compared with year-ago quarter to $5.6 billion.

In APMEA and the Latin America and Caribbean regions, process transactions grew at double-digit rates, while all other regions grew at mid-to-high single-digit rates on both a sequential and year-over-year basis.

The number of MasterCard-branded cards worldwide grew 1.2% to 959 million in the quarter and excluding the US, the rest of the world card issuance grew 10%.

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

As of June 30, 2009, there were approximately 1.6 billion MasterCard and Maestro-branded cards issued.

Now let's turn to page five.

As I mentioned earlier, net revenue grew 2.7% on an as-reported basis and on a constant currency basis, net revenue grew 7% for the second quarter.

Domestic Assessments decreased 2.2% 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.

Let's talk about an example.

The euro strengthening against the pound sterling in the second quarter on a year-over-year basis.

Therefore, when we convert the pound sterling volumes to their euro equivalents to bill our consumers, this results in lower revenue than it would have a year ago.

The pound sterling/euro relationship is not considered in our constant currency calculation of net revenue, which only adjusts for the euro and the Brazilian real translation effect versus the US dollar.

This was evidenced by GDV growth being slightly down on a local currency basis, but declining 9.3% on a US dollar basis compared to the prior year's period.

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

Cross-Border Volume Fees decreased by 9.4% versus Q2 '08.

While cross-border volumes decreased 2.1% on a local currency basis, they declined approximately 14% on a US dollar basis.

Increased European pricing partially offset the decrease.

Transaction Processing Fees increased 14.6% compared to the prior period due to an increased number of processed transactions and pricing introduced in April in the US.

On a constant currency basis, the growth for this revenue line item was 19.7%, with approximately half of the growth due to new pricing and the other half from underlying process transaction growth and increases in services such as stand-in.

Other Revenues decreased 1.6% on an as-reported basis but grew 2% on a constant currency basis.

Rebates and Incentive payments decreased 5.8%, largely due to lower volumes which had a tempering effect on the performance of our customer business agreement.

As a reminder, our rebates and incentives can vary from quarter to quarter as we sign new or renewed agreements.

Just a quick comment on pricing.

Of the overall 8 percentage point contribution from pricing this quarter, roughly one-third of it came from European pricing that we repealed effective July 1 as a result of our interim agreement with the European Commission.

Therefore, we expect the impact from pricing to moderate over the balance of the year.

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

As part of our commitment to deliver a lower expense structure this year, we have continued to implement a number of expense management measures.

Excluding special items, total operating expenses decreased 13% during the second quarter.

Currency fluctuations of 3.2 percentage points contributed to the decline.

Without the impact of severance in both this quarter and the year-ago quarter, total operating expenses declined 18%.

General and administrative expenses decreased 2.9%, with currency fluctuations essentially counting for the full amount of the decline.

But let's look at the categories within G&A.

Professional fees declined by approximately 34% or $19 million during the quarter due to a significant reduction in consulting expense and legal costs.

Travel expenses decreased approximately 62% or $18 million on a year-over-year basis as a result of continuing cost reduction initiatives, and

Personnel costs for the quarter increased 8.2% due to the $51 million severance charge.

This charge reflects a $0.25 impact on our reported diluted EPS.

Excluding severance charges, personnel costs declined 3.3%.

We will continue to monitor our business performance and may need to consider additional actions.

Advertising and marketing spend decreased by 35.8% versus the year-ago period as we scaled back our spend in several categories in response to current market conditions and in keeping with our overall cost containment efforts.

Approximately 3.3 percentage point of the decline related to the impact of foreign currency fluctuations.

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

we generated $362 million in cash from operations, and ended the quarter with cash, cash equivalents and current investments of $2.7 billion.

Earlier this month, we agreed to prepay the remainder of our obligation under the June 2003 settlement agreement in the merchant class-action lawsuit.

The company will make a prepayment at a discounted amount of $335 million on September 30 of this year, subject to court approval and finalization of the agreement.

Until that time, we continue to classify this obligation in both current and non-current liability.

We believe this settlement is an effective use of our cash and offers goods returns and allows us to put the remaining financial piece of this legacy litigation behind us.

While it depends on the timing of the court's approval, we expect this event to have a positive $0.07 to $0.08 impact on our EPS in the second half of this year, roughly equally between the third and fourth quarter.

Let me now turn the call back to Bob.

Turning to page eight, the economic slowdown around the world continues to prove challenging for consumers, our customers and for us.

We see no reason to change our view that the global economy will not begin to improve until 2010.

As mentioned on last quarter's call, this year we expect to fall below our minimum average annual net revenue growth objective of 12% on a constant currency basis.

We have continued our heightened focus on managing expenses and as a result, we now expect them to be down on a year-over-year basis, including the impact of all severance charges, which are largely behind us for those actions we have already identified.

With respect to your advertising and marketing spending, we continue to expect full-year 2009 to be lower than full-year 2008 on both an as reported and constant currency basis.

However, I caution you about using recent spend levels as a run rate for the balance of this year, as our current forecast calls for significantly higher spending in the second half of 2009 than the approximate $300 million we recorded in the first half.

To date, we have scaled back our core marketing activities in response to current market conditions and we are keeping a close watching to ensure that we're maintaining brand performance, particularly in high-growth and emerging markets.

Our views around net income have not changed since our investor meeting in mid-May.

In order to achieve at least 20% net income growth for 2009, we would need to see revenue growth of low-single digits on a constant currency basis, given our expectations for total operating expenses and excluding any impact of severance charges.

The last six months have presented challenges for many businesses, including ours, but as can you see from our performance, we're focused on achieving solid bottom-line results this year.

Looking out over the longer term, let me comment on our three year performance objectives for 2009 through 2011.

At our investor meeting in May, we pointed out that we'd identified risks around our revenue performance objective.

As we continue to work through our planning process, we currently think it is unlikely that we'll be able to make up this year's revenue growth shortfall over the next two years in order to achieve average net revenue growth of 12% to 15% for the 2009 to 2011 period.

We have not changed our view that the continued secular moment globally towards electronic payments and the resilience of our business model will allow us to deliver better top-line growth than what we will see in the near term, given the current economic environment.

We continue to expect 3 to 5 percentage points of annual operating margin improvement and 20% to 30% average net income growth over the 2009 to 2011 period.

As I have said many times before, we will always evaluate whether to make further adjustments to our expense structure, keeping in mind our intention to invest wisely to protect future growth opportunities.

But while our top-line is affected by the global economic climate, we remain committed to our performance objectives over the longer term and do not intend to jeopardize them in order to deliver short-term results

Now before taking your questions, let me spend a couple of minutes on some business highlights.

Looking first at debit, as of June 30, 2009, we had nearly 900 million Debit MasterCard and Maestro cards issued globally.

As you know, we offer a world-class debit solution that leverages our global Maestro PIN offering and our Debit MasterCard signature and PIN product.

While we have a strong global platform, we recognize that debit is inherently a local business.

As a result, we are focused on driving growth with country-specific solutions.

In the US, we signed an agreement with the Bank of the West that extends our debit relationship and we also strengthened our relationship with First Hawaiian Bank with a multi-year debit extension.

In Europe, we continue to execute on agreements.

In Finland, the conversion of local debit cards to Debit MasterCard is underway.

Debit MasterCard is also being introduced in Poland, with the first cards in the market being launched by Alior.

And in Portugal, the Millenium Bank migration continues and new debit deals have been signed with Caixa Geral Depositos and Banco Santander Totta.

Additionally, we have begun to open the French and Italian toll way system to all Maestro cards and are beginning to see more cross-border transactions as a result.

While looking at the 17 countries that represent our opportunity around SEPA, our progress continues.

Our processing of domestic transactions in these countries grew by approximately 30% versus the same quarter last year, with single-digit growth in the number of Maestro cards issued over the same period.

In Latin America, we launched with Banamex the first platinum Debit MasterCard targeting the affluent segment in Mexico.

Here, the focus is to drive usage from the ATM to the point of sale.

Beyond debit, we continue to work with our customers and partners to deliver payments innovations.

For example, BarclayCard in the US has moved the rest of the US Airways Dividend Miles credit card accounts to MasterCard World and World Elite branded cards.

Our money send platform is available in 17 countries, including the US, Singapore, Malaysia, Indonesia, Thailand, India and the Philippines.

The platform encompasses both Person-to-Person, or P2P payments, such as social payments and global remittances.

In May we launched our first P2P mobile payment service in the US called Mobile Moneysend with our partner, Obopay.

Through this service, consumers can send and receive funds via text message, mobile web browser or an internet connection using a PC.

Users have the option of utilizing a MasterCard prepaid card issued by The Bancorp Bank for use in ATMs and physical points of sale.

We really see the mobile application as being viral in nature, allowing consumers who sign up for the service to send money from one mobile phone to any of their friends' and family's mobile phones or MasterCard accounts.

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

Thank you, Bob.

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

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

Francine, can we please start the Q&A?

Thank you.

(Operator Instructions) Our first question comes from the line of Craig Maurer from CLSA.

Yes, good morning.

My first question is surrounding your willingness to acquire local merchant acquiring, quite possibly in the SEPA territory to facilitate much of that conversion and to possibly to get better economics on those transactions.

Well, Craig, let me try and interpret your question a bit.

Are we willing to begin to directly acquire from merchants?

Well, to clarify, what I mean is should the opportunity to purchase something like Carte Blanche here show up, I'm not asking for direct guidance on possible acquisitions, but is that something that you possibly planned for, should opportunities present themselves?

As you know, we have generally drawn pretty bright lines with regards to competing with our customers in terms of issuing or acquiring.

We feel we have had enough space to operate in terms of our areas of the value chain.

Having said that, we are looking at all times for opportunities to expand our presence, and we have shared with you in the past that we currently only process roughly about four out of 10 transactions that are done with our brands around the world.

And the ones that we don't process are generally those domestic transactions that are handled by the either bank-formed consortiums or other domestic processing entities.

So you can see in the past where we have been involved with, for example, acquisitions in Brazil, deals in the UK, and the acquisition of Europay France a year ago to better position ourselves to compete in those domestic markets.

We will continue to look at opportunities like that, whether it's in Europe or other parts of the world.

Okay.

And one follow-up, if you could just clarify, was there any impact in the Rebates and Incentives line from the Washington Mutual deconversion, or loss of that contract?

At this point in time, we have not seen any impact from the loss of that contract, Craig.

That comes a little later in the year, really next year.

Okay, is there any -- can you proceed any guidance on the offset that that might have towards versus increasing rebates or incentives or the overall impact that might have on the line?

The overall impact, when you just look at combined net revenue, is not a large amount.

Okay.

Thank you.

Our next question comes from the line of Andrew Jeffrey of SunTrust.

Please proceed.

Hi good morning.

Thanks for taking my question.

Martina, I realize that pricing growth decelerates in the second half of the year.

Can you talk about the long-term pricing environment?

Do you still feel comfortable with 200 basis points or 2 percentage points in revenue growth from pricing over the long-term?

Well Andrew, we have been saying this now for quite a few quarters.

Obviously, given the economic environment and what our customers are going through, you always have to always look at that very critically and make judgments what you can or cannot do.

But at this point in time, we still feel reasonably comfortable with that at least 200 basis points on a per-year basis, but it's very much tied to what kind of value proposition we would offer customers and acquirers around the world.

Okay, and as a quick follow up for Bob, you make a compelling argument on interchange.

From your point of view, given how close you are, how well do you think legislators understand the nuance of what is a less explicit argument than maybe late fees on credit cards?

I think that would vary from literally one office -- legislator's office to another and one country to another.

Focusing here on the US, there has been a heightened degree of industry focus on educating, whether it's the staffers or people in Congress and various regulators on the reason behind and the way that interchange operates.

I have corresponded with Senator Durbin, and MasterCard put together a white paper on this subject.

I think it's positive that, as a result of some of the recent regulation that was done with regards to, particular to the issuer practices, there is a GAO study that will be undertaken.

But I think that is going to throw some light and at least create a common framework of understanding and I hope as a result of that, we'll see people more fluent with the reality of all the positive things and benefits that flow from the four-party system and the interchange on which that depends.

Thank you very much.

Next question comes from the line of David Hochstim of Buckingham Research Group.

Thanks.

I wonder if you could throw a little more detail on your thoughts about Advertising and Marketing spending.

The decline in the first half was, as you said, huge, and [I was] just wondering what will change in the second half?

What kind of things are you spending money on?

And realistically, what kind of year-over-year decline should we expect?

Obviously not 36%, but 10% or 15%?

A couple of observations.

My comment was please don't use the run rate of the first half, which was about $300 million, because our current expectations are to spend significantly more than that in the second half.

We traditionally do spend more, as you probably know, in the third and fourth quarters than we do in the first and second [quarters].

So that is part of the seasonality in our business where we see heightened volumes of activity in the fourth quarter, even when the economy is not as robust as we might like it to be.

From a comparison standpoint in the second quarter, you need to also recall that the second quarter of last year included heightened spending around the Euro 2008 football/soccer championships that were being played in Europe which tended to increase last year's second quarter a little bit.

The other thing is there are a couple of variables that we don't fully control, some that we benefit from.

Media rates, for example, in most of the developed economies in the world are lower so to get the same bang for your spending, you obviously don't have to spend as much.

I would caution you, though, that there are some markets where those rates are up.

In Russia, Brazil and a few others, there continues to be higher media rates than we have seen in the past.

We put all those things together and that is why we suggest to you don't use that first half run rate, as it will be significantly higher in the second half.

We also, obviously, are hoping to see improvements in the economy, and those are opportunities for us to begin to spend and drive usage and to partner with our customers as they begin to look a little bit more forward in various markets around the world.

Okay, and maybe a follow-up.

Yesterday, Visa talked about having signed a number of new contracts that tied up business for several years.

I just wondered if that has any implications for you or if you are in a similar situation?

Obviously you didn't have any signings this quarter, big ones, but is that a challenge in terms of trying to gain profitable business, or -- ?

Everyday it's a street fight.

I must tell you that we are signing business, I'm sure they are signing business.

From the standpoint of the marketplace, there are a lot of other competitors other than the one you mentioned, whether it's in the processing space or other areas, advisory services, et cetera.

So on probably any given day, somewhere in the world, there is some deal that we're signing.

To your point, it may not be the biggest deal ever signed, but as you accumulate those over time, and those are multi-year deals that secures an increasing proportion of our business as we look forward.

But that proportion is as high as it has been over the last year or two, and I believe the last time we looked it, three-quarters of our business was subject to multi-year agreements.

Great, thank you very much.

Our next question comes from the line of Tien-Tsin Huang of JP Morgan.

Thanks.

Nice work on the expenses.

I wanted to ask a couple of quick ones.

I just want to make sure, are there other large contract decisions that are still outstanding?

I want to make sure that everything was contemplated in the net income guidance for the next couple of years.

There are lots of large contracts that are outstanding at any point in time, Tien-Tsin.

At this point, I can't predict what future mergers or other consolidations might take place.

As you know, when those things happen, you tend to get jump balls earlier than you might have otherwise, in terms of a renegotiation or a reopening of agreements.

But from my perspective, there are several that will be coming up over the next year.

We're working hard on those.

What I can't predict is the sort of unpredictable events that could precipitate others.

Clearly, if you look back 18 months ago, I don't think we would have expected some of the things that we have seen happen.

You won't have expected probably Lloyds and HBOS to get together in the UK.

You wouldn't have expected Wachovia to be part of the Wells Fargo.

You can go on and on around the world.

So in this environment you need to be flexible and adaptable and you need to be serving your customers well so that if you come to a point where the contract is open earlier than you anticipated, they are happy to continue to do business with you.

Right.

Just to clarify, actually Bob, related to the known client consolidations, have those major decisions been made?

You mentioned a couple, obviously.

To the best of my knowledge, they have been, yes.

Terrific, that's great news.

The -- a couple more.

I want to cheat and ask one additional.

Severance, I hear Bob, you say that you were close to the end and also I think Martina, you mentioned that you may need to take additional action.

So what do you need to see in order to take such actions?

Tien-Tsin, obviously, for the actions that we identified for this year, we took largely all of the severance charges.

So on those actions, we have some outstanding implementation, et cetera, which will happen over the rest of year.

But we have pretty much largely recognized the charges related to that in our P&L.

In terms of the future, I do believe it really depends on what the business environment will bring.

I think we're very focused on what the top line brings.

I think we're very focused in terms of what we need to do in the business and in the investments that we need to do.

So I don't think that we'll ever say that we are not going to do any actions ever.

I think it is normal, you have to be keyed into the current environment and you have to make sure that you are nimble enough and flexible enough in order to course correct on the expense line, if need be.

So that is why we made that comment.

Next question comes from the line ever Bob Napoli of Piper Jaffray.

Thank you, good morning.

I wanted to follow up on US credit a little bit.

It got a little bit worse this quarter, year-over-year trend and specifically on credit into July.

I'm not sure if I missed the comments on the trends of US credit, if you see that starting to see any signs of any improvement in that line.

Well, for the quarter, US credit on the purchase volume was down in the mid-teens, 15%, 16%.

I don't have, and I'm not sure Martina, if you have a breakdown of the spending levels through the first four weeks of July, but we continue to see aggregate MasterCard volumes at around the same level that we saw coming out of the second quarter.

Okay, I was hoping you'd give a little more color on the movement in SEPA.

I don't know if you can quantify a little bit or try to but any -- and you mentioned the transactions processed were up 30%.

Just hoping that you could give a little more color on the opportunity that you see, now we've been moving through this for a couple of years.

The point I made was, I believe it was domestic transactions were up 30%.

As you probably will recall, there are a lot of domestic brands and recently -- let's use Maestro as the example.

Maestro will be on the card in addition to a domestic brand and as a result, when it's used in the country, which it is 96% or 97%, or whatever percent of the time, we would not necessarily process that transaction.

As our customers move to a Maestro-only branded card or as we begin to position ourselves to be able to process transactions domestically, we're beginning to see an increase in the number of those domestic transactions.

I did mention that globally out of 100 transactions done with our cards, we are still only processing about 40 out of those 100.

But that reflects the fact that we processed virtually all the transactions in the UK, US, Brazil, Canada and I think also Australia, which means that at least in the rest of the SEPA zone, we're processing significantly less than the 40%.

So that continues to be a significant opportunity for us and we continue to work hard on trying to find ways to provide our customers with everything that they have got to day plus across-border and other benefits that Maestro brings.

Our next question comes from the line of Julio Quinteros of Goldman Sachs.

Great.

First of all, in terms of the commentary on the longer-term guidance, can you rehash the 12% to 15% comment in terms of longer-term revenue growth?

And what -- I think -- can you just rehash those?

I'm just trying to understand -- make sure I understand what the direction of the numbers would be.

It sounds like on an as-reported basis, you are not expecting the numbers to be in the 12% to 15% range longer term, is that correct?

What I commented on, Julio and keep in mind this is in constant currency, that we previously informed you or shared longer-term objectives for the 2009/2010/2011 three year period of 12% to 15% average net revenue growth per year.

Right.

We also shared that for 2009, we were not going to get there.

Sure.

We are currently talking about maybe low-single digit revenue growth for the year.

And what we wanted to do, and what I tried to do was just to connect the dots, if it hadn't already happened, to make it clear that assuming that we come out in the low-single digit area in 2009, we don't currently see a way to make up in 2010 and 2011 in order to get to that 12% to 15% average for the three year, 2009/2010/2011 period.

Got it.

And was there some underlying currency assumption that you also commented on longer term in terms of what kind of drag there could be unrecorded?

Let me just jump in here.

All of our guidance was at constant currency.

So whatever the currency does would have been on the top of it or bottom of it, depending on which way it goes.

So currency is not an issue here.

When we look at our trajectory for 2009 and we haven't really put out a rate for 2009, but when we look at the trajectory, when we add to what you could possibly get, even in a fantastic environment in 2010 and 2011, you can do the averages yourself.

It would be very, very had to get into that 12% to 15% bucket.

But having said that, we did look very much at what could happen from a bottom-line perspective, and we feel absolutely comfortable that our bottom-line performance objectives that we have out there, both for operating margin as well as for the net income growth are appropriate.

Got it, great.

And just to go back to -- just thinking about longer-term expectations.

Is it feasible to think at this point with the Card Act and constraints in the credit system that the US credit volumes at this point are probably flat, maybe even sustained down for the next 12 months or so, or could you actually see a scenario where credit card payment volumes would actually be positive at all in 2010?

We're still working our way through a variety of scenarios for next year with regards to what happens with the US credit volumes.

Just off the top of my head, I would say to you I think it's going to be hard to see growth, even in a recovering economy.

The best forecast I have seen for the US next year is 2% growth.

I think that was the IMF a few weeks ago, who put that number out.

I would, at this point, not want to bet on any kind of improvement to that level of growth in credit card spending.

Our next question comes from the line of Jason Kupferberg of UBS.

Good morning, guys.

So regarding the three-year target, I totally agree, I don't think there is any surprise here that the 12% to 15% is obviously going to be a stretch.

That is just how the math works.

In terms of the right corridor though, understanding that that it's impossible to really see out a full two and a half years beyond where we are now.

Just order of magnitude-wise, should we think of this as more line, I don't know, 8%, 9%, 10% as a reasonable kind of range?

Anything to help folks there?

Jason, at this point in time we really haven't put our budget together for next year and for the following year.

As we said, from a longer-term perspective, we definitely believe that the ranges that we put out in the past are the right zip code, but are for the next two years you are going to have to give us a little bit more time.

We're only halfway into 2009.

Lots of things happening in the economy.

We don't really know whether we're coming to an end in the recession or what might be happening next year.

As soon as we know more, we'll let you know, but at this point in time it would be too early to call.

Understood.

Just switching gears, Bob, I wanted to pick up on the some of the comments you made regarding the status of the whole interchange debate and wanted to get your views on how important do you think that the pending GAO study that was mandated, how important will that be in terms of determining the future of the US interchange system and shaping the debate there, understanding that obviously, the political environment that we're in now is very different than when previous CAO studies were done.

I'm cautiously optimistic that GAO study will shed light on the issue where there is currently darkness.

I think the combination of that, plus ongoing education of individuals will be very beneficial.

But that is a challenge that the industry faces and we have to make sure that that happens.

I just wanted to point that out, and that is the thing we get a lot of questions about, which is why I opened the call, or at least my section of the call with those comments.

Our next question comes from the line of Sanjay Sakhrani of KBW.

Thank you.

One of the things that I noticed was your -- the US area saw a decline in cards versus some of the other product areas as well as regions.

I was wondering, is there any way to quantify what kind of a volume loss was related to that, or was it negligible?

I think it's pretty hard to do that.

A lot of our customers are, for want of a better description, cleaning up their files as they work through their way through a very challenging credit environment.

And inactive accounts, for example, obviously to the degree they're charge offs or high levels of delinquency, which virtually all issuers have, accounts are being closed as a result of those activities as well.

So you are accurate.

We saw a little over 10%, I believe it was, decrease in the number of MasterCard accounts at the end of this quarter versus the same period a year ago.

While outside of the US, we continue to see positive growth of about 10% going in the other direction.

Okay, and maybe just one follow-up on capital management.

Obviously, there were some actions taken this quarter and you guys still have a fair amount of cash on hand.

Are there any opportunities for a share repurchase or any other types of capital management activities?

Thanks.

I think our position is very similar to where we were in the last quarter.

We think at this time having a strong balance sheet and good cash position gives us a level of flexibility that we may want to have for various opportunities that come along.

Clearly, the one that Martina highlighted, which you are familiar with, which is our early payment or prepayment of the legacy merchant litigation outstanding, that will have a positive impact, assuming we get court approval.

Going forward this year, we think that is a good use of the cash.

There may be other opportunities that come along.

So for the time, I think our attitude is we're keeping the powder dry, when we think we're in a period that we feel it's unlikely that we have any possible use or we feel a lot more comfortable about the environment and the degree of flexibility that we need to maintain, then we will obviously take a look at things like share buy back.

Our next question comes from line of Chris Mammone of Deutsche Bank.

Thank you.

Just wondering on the severance, I guess.

How many positions were eliminated in the second quarter, and what kind of -- what magnitude of savings can we expect in personnel on the back half from these actions?

Chris, so for the $51 million of severance, about 130 positions are being eliminated.

When you take the first quarter and the second quarter severance numbers together, that is about $70 million, and when we look at when positions are eliminated, some of which are in the latter part of this year and some are actually in the early part of next year, you are going get a payback of roughly shy of two years.

And the annualized savings -- we look at this as one program -- the annualized savings for these kind of actions are roughly in the $40 million range going forward.

Okay that is helpful.

I guess, as a follow up, or switching gears, during the analyst day I think Chris McWilton made the comment about significant debit business potentially out for bid in the US this year.

Have your views changed on that at all given the -- or has Visa's (inaudible) on customer signing in the second half, did that preclude any of that?

I think Chris' observation at that point in time was a reflection of what was going on with the consolidations as well as some deals coming up.

Those deals that have come up continue to be worked on.

As a result of the consolidations, we'll see the degree to which there are deals that come up as a result of that.

As you can imagine, banks that are managing through consolidations have a lot of priorities.

They have then gotten another set of system and operation challenges for their credit card [portfolios] as a result of the regulatory environment and new standards and expectations that they will have to meet early next year.

So at this juncture, I would say there it is probably less significant business up than what we had seen back earlier in the second quarter.

Our next question comes from the line of Chris Brendler of Stifel Nicolaus.

Hi, thanks.

Good morning.

One clarification first.

You mentioned that sequential improvement in cross-border revenues, the volumes were flattish, I think, at negative 14, including currency, but the revenues improved a little bit.

I think you mentioned European pricing.

Is that different from the European pricing that's going off July 1?

We have, in all of the line items that we have for revenues, there is -- almost all of them, there is actually European pricing in there.

It's also in the cross-border [line item], but what we actually said is that that the cross-border volume fees decreased about 9.4% and when you look at the cross-border volume decline on a US dollar basis, it's probably the best number that you can use to compare to that 9.4% is 14%, and the differential is pretty much made up by the pricing that we had back in -- that we put back in October of 2008 in Europe.

And most of that will be repealed.

But the sequential change from first quarter to second quarter where you went negative 14%, produced negative 11% cross-border growth last quarter, now it's negative 9%, that incremental pick up was not Europe, it sounds like?

That is correct.

Okay.

Any comment on cross-border trends in July?

Any insight there?

I know Bob already tried on volume in general.

As Bob said, on cross-boarder, we actually saw a lower decline than what we saw in the second quarter.

So it is stabilizing more, Chris.

Our next question comes from the line of --

Operator?

Francine, I think this is going to have to be our last question.

Okay.

Our next question comes from the line of Bruce Harting of Barclays.

Bob, I understand what you say about the averaging of the 12% to 15% revenue growth, but is that still the guidance on a stand -- for 201 or 2011 stand alone, 12% to 15%?.

We try not to, as you know Bruce, talk about annual or individual year guidance.

So whether we get a better view of a longer-term perspective and we converge on it, having gone through the planning cycles as Martina mentioned, then we would be in a position to talk about what we see happening in 2010 or 2011.

If you could confirm for me [that] we are going to have 5% or better economic growth and happy, confident consumers, then we'll probably start stepping up to some of those things sooner.

But until we start to see something, it's hard for us to make that call.

And rather than make a call that we have to change the next month or the next quarter, we're just going to wait and see how the data and the economy and consumers unfolds.

Okay.

It seems like your stock is closing the gap somewhat today, but in terms of one of the things we have noticed or what we hear from investors is concern over your debit share.

But it would appear as though your strength overseas is very strong and maybe understated by not having that Maestro data.

The question would be, [is there] any progress showing that data on a real time basis?

My understanding is that there might be one or two countries that don't get that data aggregated.

But it seems that the outlook for next year would be pretty straightforward.

As you have all said that going into this downturn, average ticket might decrease and people will just pull out their cards more, and that is evident in the transaction volume growth you have put up, which is great.

And in fact, by just my math, debit transaction growth 14% year-over-year credit, transaction growth only 3%.

But the other thing is it seems like transaction processing revenues have continued to grow nicely to the point now they are now 85%, as big as assessment revenues.

So it just seems like next year you will be on all cylinders even without a big increase in global consumer spending, because you will continue to drive transaction processing fees higher as you did this year.

And then the currency effect on assessments will hopefully make that cylinder run as well.

The first question is, what is wrong with that view of how things will all pull and kick together next year?

And second, just any comment on that Maestro data that might help us make the case more convincingly for your strength overseas?

Bruce, without make any further on what we might be seeing next year or for 2011, I think your observations in terms of our debit business is totally right.

We have a terrific debit business around the world, especially outside of the United States, but also in the United States.

So we feel very comfortable with about it.

We have been taking your input as well as others' input in terms of how to figure out how we might be able to take better business driver data, i.e.

Maestro data out there which would allow you to probably gauge our progress on our international debit business a little bit better.

It's still a work in progress.

I'm not going to make any promises [about] when we will be able to put it out, but let me tell you, we're working on it hard, because we do believe that that would be a very good data point for our investors.

Bob, I think you have some closing comments.

Let me just, in summary, say that we're very pleased with the strong second quarter performance, particularly in light of the challenging economic environment.

We remain focused on things within our control as a way to mitigate those that we can't.

It's the actions that we have taken to realign our resources that allowed us to deliver an operating margin of 43.6% and adjusted net income growth of 26.4% in the quarter.

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

We will continue to invest in the future so that we are solidly positioned once the economic tide begins to turn.

We operate a global, flexible and resilient business that will continue to benefit from the ongoing shift towards electronic payments, which consumers, businesses and governments find more efficient, secure and easier to manage.

Let me assure you that we remain committed to delivering long-term value for our shareholders.

And thank you all for joining us on this morning's call.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may not disconnect.

Have a good day.