萬事達 (MA) 2016 Q2 法說會逐字稿

Good morning. My name is Blair and I will be your conference operator today. At this time, I would like to welcome everyone to the MasterCard second-quarter 2016 earnings conference call.

(Operator Instructions)

I will now turn the call over to Barbara Gasper, Head of Investor Relations. You may begin.

Thank you, Blair. Good morning and thank you all for joining us this morning. We apologize for the delayed start it appeared that we had a lot of people dialing at the very last minute and we did not want to start the call with a lot of people still not connected. Thanks for your patience.

Thanks for joining us this morning for a discussion about our second-quarter 2016 financial results. With me on the call today are Ajay Banga, our President and Chief Executive Officer as well as Martina Hund-Mejean, our Chief Financial Officer.

Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q&A session. Up until then, no one is actually registered to ask a question. Even if you think you've already dialed into the queue for the Q&A, you will need to register again following our prepared comments.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of website at mastercard.com. Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents. The release was attached to a Form 8-K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for 30 days.

And finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about MasterCard's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our SEC filings.

With that, I went out to the call over to Ajay.

Thank you, Barbara. Good morning, everybody. Our business continues to perform well. We are very pleased with our strong results this quarter. As you can see from the release, on a currency neutral basis and excluding that special items related to litigation, we reported both net revenue and EPS growth of 14%.

Martina is going to get into the financial details so I'm going to talk little bit about the global economy first. And frankly other than the Brexit vote, very little has changed since the last quarter. The United States' economy still holding steady consumer confidence up slightly, stable job growth, low inflation.

And frankly prior to the Brexit vote many parts of Europe were showing steady signs of improvement in both consumer confidence and unemployment. And while it is still too early to predict the full impact of Brexit we will obviously watch that situation very carefully.

The outlook for Asia remains cautious. We have a prolonged slowdown in China, weaker than expected recovery in Australia. India continues to be a bright spot both consumer and business sentiment there remains strong. In Latin America, Brazil is still in a deep recession, but interestingly a modest increase in business confidence is beginning to show signs that the economy may be reaching a bottom.

In Venezuela, economic conditions continue to deteriorate, but Mexico is in a steady growth path. It is being driven by solid consumer spending and low unemployment. So as a result it is likely we will remain in a period of economic and political uncertainty at least for the near term.

And having said all of this, our business continues to grow, our fundamentals remain strong. We are seeing double-digit volume and transaction growth across most of our markets and we continue to win deals by differentiating ourselves with services.

Now I wasn't on the call last week that Martina and the team had on VocaLink, so let me just quickly share my views about the planned acquisition of VocaLink. The deal is an important component of our strategy to participate in all forms of a electronic payments and to enhance our services for the benefits of our customers and our partners. And VocaLink itself is very interesting to us for a couple of reasons.

First, when you look at all of payment flows in the world's top 50 countries and this is not just retail payments, ACH represents about 50% of that total. And the potential of Fast ACH is growing, especially given that it is being promoted by a number of regulatory bodies in Europe, the United States, and in other parts of the world.

Second, we believe that VocaLink is the best asset in this space from both a technology standpoint as well as having a very talented group of people who are respected across the industry. Beyond the opportunities available in that primary UK market they have been successful in operating and licensing their Fast ACH technology in other markets in Sweden, in Singapore, in Thailand.

They are also the primary supplier of Fast ACH technology to the clearinghouse in the United States. And finally the ability to see both card and ACH transactions will enable us to offer an even broader range of data analytics and other services to our partners.

Our card network has been part of our growth in both consumer and commercial payments for many years. And with this acquisition we will now have a new set of capabilities to capture additional opportunities in B2B, in P2P and government payment flows, regardless of what payment rails we use. So that's VocaLink.

Let me move on to a brief update on China. In June, the People's Bank of China released the final regulation of foreign card networks to operate domestically in China. We are currently working through the requirements. We need a much better understanding around their national security and cybersecurity standards before we determine how best to proceed.

We've got to weigh whether we can apply for a license alone or with a business partner. It is all connected to this deeper understanding. Meanwhile, what we are doing is we're continue to work on building out our technology on the ground as well as working with our Chinese customers on new issuance and broadening acceptance.

So moving on from there, a couple of recent developments on the legal front. In the United States the Brooklyn District Court's 2013 approval of the US merchant class-action settlement as you know was overturned by the Court of Appeals in late June. And obviously we are disappointed by that decision.

Charlie and Visa reviewed it in some detail on their earnings call last week, so I'm not going to rehash the same details. The case will be sent back to the District Court where we expect the first order of business will be to appoint counsel for the injunctive release class. MasterCard will then work with all parties to see if we can find ways to reform the settlement in line with the Court of Appeals decision.

And as you'd expect, our focus on that work will be on rule changes and the scope of the release, which were the issues in the Court of Appeals decision, not the money damages. On the money damages, note that our financial exposure remains capped at 12% of any settlement or judgment under the agreements we entered into with the bank defendants and with the Visa in 2011.

Additionally in July, a UK court issued a decision, in one of the UK merchant suits, seeking interchange damages. That court awarded retailees a portion of the damages they had been seeking and that amount along with anticipated legal fees and costs was taken as a charge in the second quarter. That is the special item you see in our results.

Although we don't believe the retailers suffered any damages, they are gratified by several aspects of the courts decision. Just one example the court recognized that an appropriate level of domestic interchange is substantially higher than the 20 and 30 basis points imposed by the European interchange fee regulation that went into effect last December.

So now let's move on to some of our recent business activity. During the quarter, as normal, we signed a number of new deals and renewals supporting the expansion of our business around the world. I am going to run through a few examples.

We continue to make progress in our US consumer business. Recent highlights include the renewal of our partnership with Huntington National Bank across their debit, credit and commercial businesses. Expanded acquisitions of new consumer credit accounts with several of the largest banks in the market.

In addition we had important wins in the co-brand space including American Airlines, [with Citi] and Barclay card will both be the issuers. As well as Inter Continental Hotels, Bed Bath and Beyond and some others. We also renewed just announced it yesterday actually, our consumer credit co-brand with PayPal, an important component of our overall relationship with them which as you heard from Dan Schulman on his call, we are actively seeking to expand.

We continue to drive our commercial business forward. One of the most important verticals for us is travel and now in addition to our relationship with eNett and Travelport that we've talked of in previous calls, we juts signed a new global deal with Amadeus a leading travel, technology company. Today travel agencies make more than $300 billion in the annual payments to airlines, hotels, and other travel providers largely, wire bank transfers and checks.

What with this agreement does is it combines Amadeus' new B2B wallet and virtual payment technology with MasterCard's commercial card capabilities, we will provide travel agencies and travel providers with a fast, secure and automated way to pay and get paid.

We continue to perform well outside of the US. In Canada we signed two new issuer deals, renewed four issuer and co-brand deals, including MBNA, which is a division now of the Toronto Dominion Bank. And President's Choice Financial, which is part of Loblaw's one of the largest retailers in Canada. Which by the way included excludes of issuance.

In Europe, we are pleased to sign an expanded agreement with Yapi Kredi one of the market leaders in Turkey for a larger portion of their credit portfolio. Prior to this deal most of their credit business was with a competitor. In addition to the deals I mentioned previously, we are continuing our momentum in the co-brand space globally. We are very excited we have renewed our partnership with WalMart in Canada and also signed a new agreement with them in China.

We have partnered with Access Bank in India as well as Miles and More, one of the largest global frequent flyer and rewards programs to launch India's first multi-currency co-branded prepaid card that supports up to 17 currencies to facilitate both domestic and international card usage.

Finally, you've heard us say many times how we've been successful with using services as a key strategic differentiator for winning deals. As one example of this, we're happy to have renewed a long-term debit agreement with Bendigo and Adelaide Bank, one of Australia's largest retail banks. It includes commercial cards and a flip of the majority of their consumer credit business. That deal includes a full complement of our services, consisting of advisors, loyalty solutions, and our suite of safety and security products.

We signed a deal with Carta C one of the largest card issuers in Italy to begin issuing debit cards as well as to use Advisors' Consulting Services. You will hear a lot more from us about how we differentiating with services at our upcoming Investor Day in September.

Moving onto our digital strategy, you know we've long said this is a marathon, not a sprint. But we've made some significant progress this past quarter, and there's more to come. So about two weeks ago we announced an important industry milestone when we became the first network to deliver a digital payment service across all devices, all channels.

With MasterPass, consumers can now decide how and where they prefer to shop whether that's in app, online, or in-store using a bank branded offering from the issuer of their choice knowing that their payment information is protected by our technology. We've also previously talked about our Digital-by-Default strategy, which enables issuers to auto enroll card holders onto the MasterPass service through their online banking app, without any additional effort by the consumer.

We're very pleased that more than 80 million accounts will be automatically enabled by the end of this year, 80 million. As the service has begin to roll out globally starting with Europe and Asia and later this year in the United States, with Bank of America, with Citibank and Capital One.

Further, issuers can use MasterPass to differentiate their own wallet offering by using our open APIs to integrate other services from us such as purchase alerts or paying with points or services that they have developed themselves. And lastly, in terms of geography, including the recent expansions to Greece, Switzerland, Columbia and Ukraine, we are now live in 33 markets.

From an acceptance standpoint, MasterPass is currently available at hundreds of thousands of merchants, online and in app. We're pleased to have recently added IKEA and will soon be adding Saks, Lord and Taylor, and The Cheesecake Factory as more examples. With the introduction of NFC capability consumers will now be abe to use MasterPass at the more than 5 million merchant locations in 77 countries that accept contact-less payments today.

Contact-less will first be available to Android device owners in the United States later this month with a global expansion to follow shortly thereafter. And that moves to the last topic, is tokenization technology. The MasterCard Digital Enablement Service, or MDES, we continue to make solid progress around making transactions more secure for MasterPass. Which by the way is already enabled for contact-less transactions, with online and in app to follow.

But also for digital partners, most recently we helped Android Pay expand to Singapore as well as Apple Pay to move into Canada, Hong Kong, Switzerland and France. In addition, we're also pleased to be partnering with Microsoft on the launch of their cloud-based mobile-wallet solution for Windows 10 compatible devices. All these examples illustrate our continued commitment to deliver secure consumer payment experience to our cardholders using the mobile device of their choice.

So with that I'm going to turn the call over to Martina for an update on our financial results and operational metrics. Martina?

Thanks, Ajay and good morning, everyone. Let me begin by giving you some highlights on the second quarter starting with page 3. Where you see the difference between non-GAAP reported and currency neutral growth rates for this quarter.

These figures exclude the impact of these special items taken in both this quarter and the previous quarter related to the judgment issued on Sainsbury's and the settlement we made with Tesco, the two largest merchants involved in the UK-merchant litigation. I would like to point out a few items using the currency neutral growth rates.

As Ajay said net revenue growth was 14% for the quarter coming in a bit higher than our expectations. Operating expenses grew 13%, primarily due to continued investments to support our strategic initiatives as well as higher legal costs of which the majority of are not likely to recur. We saw a higher tax rate in the year ago quarter due to the non recurrence of a discrete US foreign tax credit from which we benefited in the second quarter of 2015.

And with all that EPS was $0.96, up 14% year over year. Share repurchases contributed about $0.03 per share and as of July 21, 2016, we have $2.7 billion remaining under our current authorization. Lastly, cash flow from operations was $1.1 billion and we ended the quarter with cash, cash equivalents and other liquid investments of about $6.4 billion.

Let's turn to page 4 where you can see the operational metrics for the second quarter. When comparing these numbers to the last quarter, just remember the first quarter saw about a 1 PPT benefit from Leap Day, which explains most of the differences. Our worldwide gross dollar volume or GDV growth was 11% on a local currency basis. Down 2 PPT from last quarter. Overall, our US GDV grew 8%, made up of credit and debit growth of 7% and 8%, respectively.

Total US GDV had less than 1 PPT headwind from lower gas prices. Outside of the US volume growth was 13% on a local currency basis and that's about down 2 PPT versus last quarter, with low- to mid-teens growth in each region. And beginning on June 9, 2016, as a result of the new EU regulations our volume numbers reflect the absence of domestic co-batched volume that we do not process particularly in France.

In the second quarter we saw an impact of 1 PPT on worldwide volume growth and a 3 PPT impact to European volume growth. The impact will become more pronounced over the next year and this has been contemplated in all of our forward guidance. Cross-border volume grew 10% on a local currency basis slightly lower than the 12% we saw in the first quarter.

Let me turn to page 5 and here you can see processed transactions grew 14% globally to 13.7 billion and that's a very similar increase on what we saw in the first quarter. And globally the number of cards grew 7% to 2.3 billion MasterCard and Maestro branded cards issued.

On page 6 here you see some highlights on a few of the detailed revenue line items. Unless otherwise stated, the growth numbers I call out both here and on the next slide are all on a currency neutral basis. As I said net revenue growth was 14% a bit stronger than we expected. We saw continued strong volume and transaction growth, plus a higher contribution from some of our services businesses. Rebates and incentives grew 23% primarily due to higher volumes as well as some deal renewals.

Looking quickly at the individual revenue line items. Domestic assessments grew 10%, while worldwide GDV grew by 11%. The difference is primarily due to mix. Cross-border volume fees grew 14%, while cross-border volume grew 10%.

The 4 PPT gap is due to a number of pricing actions partially offset by a higher mix of intra-Europe activity. Transaction processing fees grew 21% primarily driven by the 14% growth in process transactions, as well as some pricing. And finally, other revenue grew 25% driven primarily by services such as Advisors, APT and our safety and security product offerings.

Moving now to page 7. Here you can see the total operating expenses after excluding special items increased 12% in the quarter or 13% on a currency neutral basis. Our APT acquisition contribution at about 1 PPT to these growth rates. In addition, 5 PPT was due to higher legal costs. As I already said, the majority of these are not likely to recur.

The remaining 7 PPT was primarily due to higher personnel costs related to our continued investments in strategic areas such as a digital, data analytics and geographic expansion. Also our data processing expense growth is normally in line with transaction growth. However this past quarter the growth was higher due to the fee we now pay to [Eness Picar] for processing domestic Russian transactions.

Let me turn to slide 8 and here we can discuss what we have seen in July through the 21st where most of our drivers are up from the second quarter. The numbers through July 21 are as follows. Starting with processed volume we saw global growth of 11%, slightly lower than the 12% we saw in the second quarter. In the US, our processed volume grew 8% down 1 PPT from the second quarter with slower growth in credit but higher growth in debit.

Gas had less than 1 PPT negative impact on our July growth, that's very similar to the second quarter. And processed volume outside of the US grew 15%, up a bit from the second quarter primarily driven by Europe and Latin America. Globally processed transaction growth was 17%, up 3 PPT from what we saw in the second quarter.

Processed transaction growth outside the US was up 1 PPT, with increases in Europe and Latin America. And the US growth was up 6 PPT driven by new opportunities of pin routing. With respect to across-border our volumes actually grew 14% globally and that's up 4 PPT from last quarter with faster growth in Europe. We also saw faster growth in Middle East Africa which was likely related to the timing of Ramadan.

Now looking to the full year of 2016, there's really no change in our business outlook from what we discussed with you in our earnings back in April. Currently we don't anticipate any significant impact from Brexit this year. However foreign exchange headwinds will continue to be with us in 2016 although they continue to moderate from the recent past given current FX rates.

Our underlying business fundamentals remain strong and we will continue to run the Company for growth both on the top and bottom line, as well as balancing our investments with astute expense management. As we look at full-year 2016 and after factoring in our currency-neutral methodology, we continue to expect to be at the low end of our three-year revenue growth range.

When you model on an as-reported basis, you will need to adjust for the impact of all currencies. And at current rates we estimate that, that would mean about a 2 PPT headwind to net revenue growth and the bottom line which is less of a headwind than what we said on our April earnings call.

Now let me call out a few other items that you should consider when modeling 2016. For rebates and incentives, we now expect to see growth of about the same as the 20% as-reported growth rate we saw in 2015, after factoring in the impact of the new American Airlines co-brand renewal. On expenses we continue to expect total operating expense growth in the high single-digit range for our as-reported results excluding special items.

On a currency neutral basis, we continue to expect low double-digit growth. Be mindful that we are ramping up our efforts of MasterPass which impacts G&A and A&M, particularly in the third quarter. You should now assume a tax rate of slightly less than 29% for 2016.

And finally, on the subject of share repurchases. Now while year to date we have bought back about $1.8 billion, most of that occurred early in the year. As we were out of the market for most of the second quarter given the pending VocaLink transaction. As I said last week, once our trading window opens in early August we expect to continue our repurchasing activity.

Now let me turn the call back to Barbara to begin the Q&A session. Barbara?

Thank you, Martina. We are now ready to begin the question-and-answer period. In order to get to as many people as possible, we ask that you limit yourself to a single question and then queue back in for additional questions.

Blair?

(Operator Instructions)

Craig Maurer, Autonomous.

Yes, hello, thanks. Two questions.

One, if you could provide us your thoughts for the industry regarding the deal Visa signed with Paypal? And secondly, if you could comment if there was any disruption in volume in Europe related to any of the geopolitical problems there -- terrorism, so on and so forth? Thanks.

Hello, Craig. Little bit about both.

The second one is the more transactional question and I can tell you that in places like Turkey and other such locations, there's no doubt that the impact of some of this activity in terrorism does impact what's going on there. Our cross-border growth to Turkey is down significantly compared to last year. Card holders from Germany, Russia, Sweden, and the US are not traveling there with the same level of frequency as they were, clearly. We're also closely watching travel to other markets in France and so on. Interestingly, in the UK, we're actually seeing an increase of inbound cross-border spend. So it is kind of bouncing around; but specifically in couple of countries they are impacted by terrorism. There's no doubt that it causes some angst in cross-border travel. Having said that, remember what Martina said, right now our cross-border volumes for the first few weeks of this quarter -- it's only a few weeks -- are up compared to where they we were last quarter; and in fact, Europe is one of the contributors to that being up.

So that part about Visa and PayPal -- I've said this a few times to a number of you when I've met you: back in June of 2013 we had implemented a new approach to digital wallet operators that applied to all staged wallets -- and, by the way, not just Paypal, so I want you to understand that -- with the intent of bringing consistency and transparency to the system. Transactions should flow through with clear data flowing through; the brand of the bank and the network should be visible to the consumer and the merchant. There were many reasons for us to be thoughtful about that digital wallet operator principles. We're still exactly where we were with those principles and I think what I'm really pleased to see through a constructive dialogue with Dan Schulman and his management team at Paypal, that Paypal is actually working to resolve some of those concerns we all had around the lack of transparency, around these stage wallets, and well as ACH Clearing. And that's what you saw in the announcement that he and Charlie made a few days ago.

And as you heard Dan mention on his earnings call, they are in discussions with others on the payment space to work with similar concepts, or some more different but in the same space. We have worked with Paypal for many years. We have a good working relationship with them on a wide range of opportunities. I just told you, we just renewed our credit co-brand portfolio with them, in fact yesterday. So that gives you a sense of that manner in which Paypal is trying to work with the industry. I think this is actually a good thing for PayPal and for the industry. Because at the end of the day, providing consumers the ability of having similar simple ways of paying is good for all of us. Everything is better than letting them use cash, and that's where we are all headed.

Tom McCrohan, CLSA.

Hello, Ajay.

When you talked about China and some of the security standards, are you referring to the EMV standard that China adopted and it being different from what's been embraced around the rest of the world?

No, actually, that's a tactical problem that actually at the end of the day creates cost and implications for solving for the way chip cards work in China and Chinese chip cards work outside of China. It's solvable; it is not the best thing to do, but it is solvable.

What I'm referring to is that they recently, in their policy regarding the opening up of the market for people like us to come in, they put in a couple of clauses around complying with their new national security and cybersecurity policy. The little challenges of the new national security and cybersecurity policy has not yet actually been passed into a form that is visible to us in a document that we can say, okay got it. Do this, do that, we are okay. It's not in that form So we are little bit in between territory, between understanding that they want to have a thoughtful national security and cybersecurity policy, which they are entitled to. But we don't understand the implications for us in terms of operating a network on the ground.

So, whether we operate with our own license or we operate in a JV with someone else or we do some other creative thinking around this, will all depend on clarity of these kinds of elements that they've put into the policy they recently announced. That's what we are trying to sort out. Meanwhile, there's a lot of stuff to do for us in China. We're continuing work on issuance, continue work on building out acceptance; we've been continuing some work on basic technology development. So that when we get clarity on this, and Martina and I are confident we understand what we're signing up for, then we can move forward relatively quickly from that space. So it is one of those in between spaces.

Next question please.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

I was wondering if you could address the comments you made about US debit accelerating in July. I think Visa had made some comments about seeing the mirror image of that, some deceleration. Is there something -- are there actions that you are taking that are causing that? Or is it decisions of individual acquirers or merchants? Anything you can add to that discussion?

If you heard us saying we're going up and the other ones are reducing, that's just the differential impact for both of us. So I don't know how to comment on that one. I'm not saying that you are getting a great change in underlying consumer secular spending towards debit -- don't conclude that. In fact that's not at all what we are talking about. This is all to do with pinned routing and working on PIN transactions. And, as I think I've told you a couple of calls ago -- maybe a few before that -- this stuff will move around a little bit and bounce around as merchants move the different routing in their routing tables depending on what's working for them. And it's not just about pricing, it's also about speed of approval, it's about many different things that we look at. Most of the bigger merchants have a very sophisticated and quite thoughtful way of deciding their routing tables and we keep working with them. So some quarters are better, some quarters are little less good. What you're seeing currently is a better period.

Yes, and having said that, when you look at our three weeks July numbers, where I said that the US transactions are actually up by 6 PPT, actually what is happening is that we have more of an opportunity to actually get routing for merchants because we happen to be now on more cards, on the back of the card.

Great, thanks very much.

Darrin Peller, Barclays.

Thanks guys, nice job.

Just want to touch on specifically the pricing changes that went into effect to allow the transaction fees to increase or -- I think you said it was 7 points faster than the actual transactions. Similar with cross-border outpacing volume growth. Was it yield -- all yield improvement -- on price? Or was there also a mix element to it? And then just maybe on pricing trends going forward? Thanks, guys.

Yes, so Darrin, we said in the cross-border line as well as in the process transaction line and those fee lines, that we have some pricing actions. And it really was what I would call moving around the deck chairs in a number of countries which allowed us a net-net to take some price. In terms of actually anniversarying those kind of prices, about 50% of those actions have anniversaried now with the second quarter. And the other 50% of those actions will be anniversarying by next year. And by the way, this is nothing different than what we had called out in the last quarter. So this is just the normal run rate that happens from time to time.

All right, just as my follow-up, any early sense on impacts from Europe with regard to Visa Europe deal?

Look, it's very early, okay. They just about closed the transaction; and having said that, we obviously have prepared our group and our sales teams to make absolutely sure that we are with our clients and that we do all of the actions that we need necessary. But it is extremely early. You see that Europe is actually growing still very nicely in the mid-teens from a volume point of view. So I don't think we have anything to add at this point.

Just one extra comment on pricing -- and I know your question was about two specific line items in the thing -- but overall, for us in the second quarter pricing contributed a little less than 1 percentage point to our net revenue growth. That's just so you know the whole picture.

All right, makes sense; thanks, guys.

Chris Brendler, Stifel.

Thanks, good morning.

Another question on Europe, if I could. I think, Martina, you just said that the volume growth in Europe excluding the change in France was mid-teens? Just making sure that's right.

It is including, Chris. When you look all of the volume, the GDV volume in Europe, it's still in the mid-teens range.

Okay, but you reported 8.8 because of the change to the co-badge transactions in countries like France.

Exactly.

Okay, great. That's more than double what Visa Europe has now disclosed, or Visa has now disclosed their European segment is growing. And the question I keep getting from investors that I'm hoping you can try to shed some light on is, there's been some discussions about yields and the difference in yields between MasterCard and Visa. And that Visa will be potentially raising some of their yields.

And I just want to talk about -- and maybe you can just refresh our memories -- how are you driving these market share gains, growing more than double the rate of Visa Europe at this point despite the higher perceived pricing levels? What I've been telling folks is, it's actually not that different; if you get down to the bank level you're actually closer to apples to apples on a pricing basis. But maybe you can just give us some of your thoughts on that current dynamic and how it might change with VIsa Europe now being part of Visa? And also does VocaLink play into your strategy of competing against Visa Europe? Thank you.

First of all, when you look at our overall pricing in Europe versus Visa Europe, you are absolutely right that our pricing is higher when you look at it all accumulated together. It's not quite at the level where our global pricing is; it's lower because, as you know, in every geography and in the country it depends in terms of whether we just were to be able to license our brands so that we get the volume assessment, and whether or not we actually get see the transaction from a processing point of view. All of you guys know, in Europe we process about 40% of our transactions only. And lastly, in terms of what kind of services we actually delivering to the client.

When you look at the largest client, I have to believe we have very similar pricing to Visa. It might be different in terms of when you look at the medium and then the smaller clients. Now having said that, what Javier and his team have done in a really great way is, using the global capability of MasterCard with all the products and services that we have around the globe, to be bringing that in a seamless fashion to our European clients. And that's what they really like to see. This is what did not happen with our competitor, given that there were two different companies. And given that we are generally the smaller company, I always have to say that we have to put more points on the board. That means we have to rise higher in order to make sure that the customer gets that differentiated product and service that they are seeking in order to basically address their [pain] points and have fantastic products for their consumers. That's how our team is winning every day in the market.

And your question on VocaLink -- I think you should remember -- I said VocaLink is not about competing with Visa Europe, by the way. VocaLink is about us wanting to be real players in every aspect of electronic payments and the way they are developing. And the reality is that today across the world 50% of payments -- not just retail -- are ACH. But within that, what is really interesting is the opportunity to grow Fast ACH and VocaLink is one of the few players that has not only an outstanding Fast ACH platform implemented in the UK but also implemented in other countries. And most of ACH tends to be local. VocaLink's demonstrated an ability to take that Fast ACH platform and make it globally adaptable. And you can imagine the possibilities of that over the next decade.

So I really want you to think about us doing the VocaLink transaction. If it all works out, once we are through all of the regulatory steps, our strategic intent is to play across all aspects of these payment rails -- for individual consumer to merchant payments, but also B2B, P2P, and government payment flows. And that's how we see our footprint growing over the years.

Great, thank you so much for the color.

Jason Kupferberg, Jefferies.

Hey, guys.

Just a question about the full-year 2016 topline outlook, I know you said that you are reiterating to be at the low end of the three-year target, which is low double digits, so I'm going to call it 10% to 11%, for arguments sake. You are running at 14% through the first half of year, so can you just remind us might lead us to the decel? Or are you just being conservative on macro? I guess you've got USAA will be deconverting at a faster rate and maybe some lapping of acquisitions? Just wanted to have the pieces there.

Jason, excellent question.

Thank you, Martina.

Listen, there are three factors that are contributing to the deceleration on the growth rate for the second half, which would land us pretty much in the same place as I said at the beginning of year, which is the low double-digit number. The first one is, we have anniversaried the acquisition of APT, right? And we said all along it was about 1 percentage point. So that's going to come out. Secondly -- yes, we do have on USA credit portfolio, it's rolling off very fast. So we will have a more significant impact in the third as well as in the fourth quarter. And then, thirdly you just heard us, that we actually we renewed American Airlines and starting with the third quarter we will have more rebates and incentives coming into that line item.

Okay. That explains it.

Sanjay Sakhrani, KBW.

Thank you, good morning.

Ajay, can you talk about where you are with the future pipeline of M&A? You guys have been decently acquisitive, and going forward, should we expect you guys to digest some of these acquisitions?

So I don't have any indigestion right now, just to be clear. We've been digesting the other ones in the past and it has actually helped us build out a lot of capabilities. It is not a coincidence that our other revenue line is growing at the rate it is been growing for quite a few quarters. It is not a coincidence. And remember, after a year, when you anniversary an acquisition, it comes into the base. After two years the entire P&L comes into our base. So we're quite disciplined about tracking ourselves against it. Some of the acquisitions do better than what we thought we could do with them; some of them don't do as well. That's just the reality of what we are trying to go through.

But in the process we have built out a decent capability in data analytics and information services. We've added to our capability in loyalty and rewards. We've added to our capability in technology and connectivity for eCommerce and gateways, as well as to connect with bank accounts around the world, even before the VocaLink acquisition. So that's what we are trying to do.

I honestly, at any point of any time in any quarter, I think Martina and her team are working on a number of possible acquisitions. What tends to happen is, 2%, 5%, 6% of them show up at any level of second level analysis. By the time we are done, one out of many gets done. So it is tough for me to tell you that I have two next quarter or three in the fourth quarter -- I'm not going to do all of that. I'm just focused on, first of all, getting the ones we are already doing to keep doing well. Second, you've got to work really hard between now and the next few months to get the VocaLink acquisition through all the processes of regulatory approval, and get our Company to be an excellent player in the ACH and Fast ACH game -- first with a responsibility to the UK, because we are going to be a large player there in terms of this. But also with the ability to see how we take it elsewhere.

Our priorities remain in the area of loyalty and rewards, in the area of data analytics and information services, in the area of safety and security. Some degree, all this depends on us being able to see more transactions, to be able to see and handle and touch more transactions. Processing assets are very helpful in that space, so we tend to play through these as we go along. Honestly, I think Martina has done great working with me, because she's looking at a few deals all the time. That is probably not a great sartorial comment, but that is true.

Next question, please.

James Schneider, Goldman Sachs.

Good morning, thanks for taking my question.

I was wondering if you can give us a little bit of an update on the European acceptance landscape? I think you talked last quarter about how you've been giving an update on what you've seen due to the European interchange cuts in terms of merchant acceptance. Obviously we are seeing some increased volume growth there, so any way you can parse out how much of that might be due to the interchange reg changes? And how much of that is just better economic activity or other factors?

Jim, I do have to say -- and I just came back from another trip in Europe -- there have been quite a bit of changes on the merchant acceptance landscape because of the lower interchange fees. And, as you might remember, all during the last couple of years leading up to the changes that came in last December of 2015, we were hoping that, that would actually change the view of some of the merchants to be wanting to accept card payments. Because, quite frankly, [no] card payments are a heck of a lot cheaper than what you have to do with cash. So we are seeing fairly large scale changes coming through with some very large merchants. So that's what we're seeing first. So for instance, a grocery store like Aldi, which is a very gruffy discount store -- they don't even have shelves in there in their store, you grab actually goods out of the boxes that they just rip open -- they finally are opening or have opened card payments.

And there are a number of those large retailers who are now willing to do it, and we see it in pretty much in every European country. Where we haven't seen yet as much movement is on the smaller merchants; and that's obviously where there's a lot of work that we still have to do. And we are hoping that, that will continue to allow us to change the secular trend in Europe, which, outside of the UK -- the UK a lot of it is already electronified -- but in the rest of Europe, in the continent, I always call it that this is still an emerging country for us. That will help us on the secular trend from cash and check to electronic forms of payment and will help our numbers over time.

Thank you.

David Togut, Evercore.

Thanks, good morning.

Martina, you called out the impact of the separation of scheme from processing in Europe, effective June 9. I'm wondering about another major provision that went into effect June 9, particularly the new merchant routing provisions. Could you comment on the opportunity to gain processing share, particularly in large markets like France and Germany, as routing opens up outside of these local payment monopolies?

Yes. I think all of these changes in the regulation actually do help us over time to be doing more processing in Europe. As I just said to a prior question is, we do about 40% -- about 40% of MasterCard transactions in Europe are being processed by our own network. Now with the separation of the scheme and the switching unit, our processing unit -- that processing unit is actually free to go in the differentiated way to the market and to be hopefully getting even more switching opportunity from all of the local players, be it the banks or be it the merchants. And I think the merchant routing rules does play into that.

Just remember, when you go back to SEPA, that was implemented back in January 1, 2008 -- it opened the kimono a little bit and we were able to move up process transactions from -- I think, Barbara, it was in the mid-teens or -- mid-20s, I think; low 20s, something like that -- going up to the 40% range. I think this is just the next click from a regulatory point of view which allows us to work with those kind of companies to move up more from a transaction basis.

Just to add to what I said to Sanjay a little while ago on services, why does all this matter to us? Of course there is a revenue impact in the beginning when you process more transactions. The most important thing is, all our services are built off our core payments capability. We're not building services that don't connect back to our core payments. Those core payments require us to be able to see transactions, whether they be debit, credit, prepaid, or commercial transactions. That's why VocaLink is also important. The more we see transactions, the more we can do with them; and the more we can help build yet another strong revenue stream for this Company for the next decade. That's what we are trying to do.

Thank you very much.

Bill Carcache, Nomura.

Thank you, good morning.

Ajay I wanted to follow-up on your comments about the constructive dialog taking place with PayPal. First, is it reasonable to expect that -- you have mentioned the stage digital wallet fee and the rationale behind it previously. But is it reasonable to expect that you guys would eliminate that now? And then secondly, does the tone of the discussions that are taking place around you lead you to think that it is not just you guys and Visa but perhaps your issuing bank partners that may get on board with promoting PayPal? And finally, along those lines, can you help us think through what exclusivity element of the Visa agreement with PayPal would mean for MasterCard's issuing banks?

The last one first: I can tell you that I'm not clear I understand enough about what exclusivity Visa signed with PayPal because we are not encountering any difficulty while talking to PayPal in that space. So I don't know exactly what the nature of their exclusivity is. You will have to ask PayPal or Visa. Because I am pretty clear that we've got enough good conversations going on not just now, but for a little while. Obviously, there's stress between these conversations, right? Our digital wallet operator rules, when they went into place in 2013, were not replicated by others. As well, we made our position clear that time that we wanted to have a clear, transparent, fair methodology in this digital wallet development. It is been sometimes good, sometimes stressful, but constructive.

And my view always has been that, if PayPal wants to -- or anybody else like that, a digital wallet operator -- wants to use our rails of credit and debit to be able to build their own model, then they cannot just use our rails when it suits them and use another rail to go around us and the banks where it suits them. There's got to be a more constructive partnership. So yes, we have a constructive partnership on co-branded card -- that, yes, we do. We've had it earlier, we've renewed it again literally yesterday. So that tells you that, that partnership has depth beyond one signature or one contract with somebody or the other. But also, we've all been discussing the whole aspect of how this digital wallet operator system will work.

Now, if PayPal's methodology of operation, from what I've learned from their announcement with Visa -- if they reflect what our digital wallet operator policies put into place -- yes, that any fee we make from them will go away. Because the fee is not meant to be there if they are doing what's in the policy. But I can tell you that fee is de minimis. That's not -- we are not trying to use a fee to get them to change their policy. The fee was used to manage through all the difficulties that their policies were creating in terms of data and transaction management.

So let's just be clear about what this is all about. This is not about forcing them to do anything, this is about our perspective of how the marketplace should develop transparently and openly to merchants, to consumers, to banks, to PayPal, and to all of us. That's what we're trying to build. So I think it is a constructive dialogue. I think PayPal is very much a part of that dialogue. I think this could all end up in a good way for the industry as a whole -- for banks, as well as for networks, as well as for PayPal. Will there be changes in the dynamics or the economics for a bank, works for the network, works for PayPal? Everything to do with digital changes those economics. But that doesn't mean they are bad; you're just taking out other transactions and growing in volume as well. So I have a gently positive view about where this is going.

By the way, I'm not saying there aren't hurdles along the way, there aren't road blocks along the way. Remember, we've been talking to them for two, three years; we don't yet have an announcement to tell you of the kind of transaction that Visa has. So everybody has their own ways of approaching transactions and has their own competitive dynamic and their own way of thinking about where the strategy is going. That's actually okay in an open competitive market. It is a good thing.

That's very helpful, Ajay; thank you.

James Faucette, Morgan Stanley.

I just wanted to ask a couple of quick follow-up relationship questions.

And so I think you've made it pretty clear that you want to work more closely with PayPal, et cetera. But from a process perspective and as it relates to the stage wallet -- do have to reach some sort of agreement with PayPal or others that would be subject to that? Or can they just start passing through the transaction data and hence avoid the stage wallet fee? I guess, more importantly, as we look at the case with the merchants and -- like your prepared comments seemed to indicate that you wanted to pursue an adjusted settlement, et cetera.

I'm just wondering if there would be perhaps any benefit to MasterCard to open up the discussions with those groups more widely so perhaps we could address some of the issues that may be evolving out of EMV, et cetera? Or if you would prefer to keep those two cases separate, if you will?

So let me take the second question first; that way I remember it better. So the second question -- honestly litigation is complicated enough without trying to broaden things. When you already have an agreement between tens of banks, Visa, MasterCard, tons of people on the other end -- it doesn't pay to start broadening things. Who knows how this will go, I cannot predict, because there's other players who all have to come to an agreement, but we will see. I think we made real progress and we had a good deal on the ground, which a previous judge had signed off on. But you know what? Courts decide what they do, and while we could be disappointed, we have to abide by it. So we are going to find our way through that, working with other folks. I don't think I can tell you which way that will get resolved. I won't even like to speculate on that.

The part about PayPal -- I want to make sure you guys don't get focused on some stage wallet fee, because that's actually not what this is about. The fee is de minimis. This is not a large fee either for us, or for PayPal, by the way. That's not what this is about. It is about a set of rules and policies around what the digital wallet operator rules are. That's what this is. Could PayPal comply with those rules without some master agreement with us? Yes. They could. But we already have agreements with them on a number of things and they are not the only digital wallet operator out there who wants to work closer with banks and networks and merchants. My view of this is, if we can collaborate together and we can make this easier for a consumer in the process, and for a merchant in the process, that's a good thing. We should be doing it.

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

Glenn Greene, Oppenheimer.

Thanks for squeezing me in. Most of the questions have been asked; I will just ask Martina an easy one.

The other revenue growth -- the 25% revenue growth -- may be a little bit of granularity. What is driving that? Is there any acquisition benefit in there or is that at this point you would consider that all organic?

What did you say -- 25%?

Other revenue.

From an other revenue point of view you, do have the APT acquisition in there. Most of the revenue for the APT acquisition is actually in that particular line item. But I did call out actually not only APT; I called out Advisors, so we actually had a really nice increase in revenue from an Advisor. And this is in our consulting business. And then, secondly I also called out our safety and security products, which are our fraud products, and also that had a really nice increase.

But I guess the question is the expectations going forward -- how should we think about this as we normalize and get past the APT?

First of all I'm not going to give you individual line items. But I have said over the last few quarters that these services businesses are starting to produce the kind of growth as our core business. And actually, when you look at these line items, they are their producing a little bit higher than our core businesses. So you should be seeing that continuing in some fashion.

Okay, great. Thanks.

Okay, guys, thank you for all your questions and I will leave you with just a couple of closing thoughts. Picking up where I started, our business continues to perform well. You see that reflected in our strong transaction and revenue growth. We are executing well against that digital strategy; our services are continuing to help us differentiate and win new deals.

We hope that many of you can join us at our upcoming Investor Day in New York. I think we will be able to show you the opportunity to hear about our strategic focus areas; but also, most importantly, give you a chance to experience the various ways we are working to create a better consumer experience and shape the future of payments. Give you a chance to touch and feel what we are up to. Thank you for your continued support of the Company. Thank you for joining us today.

This concludes today's conference call. You may now disconnect.