萬事達 (MA) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter 2012 earnings call.

My name is John, and I will be your operator for today's call.

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

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Barbara Gasper.

You may begin, Barbara.

Thank you, John.

Good morning, everyone, and thank you for joining us today either by phone or webcast for a discussion about our fourth-quarter and full-year 2012 financial results.

With me on the call this morning are Ajay Banga, our President and Chief Executive Officer, and 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.

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

Both the earnings release and the slide deck include reconciliations of any non-GAAP measures to their GAAP equivalents.

All of these documents have also been attached to an 8-K that we filed with the SEC earlier this morning.

A replay of this call will be posted on our website for one week through February 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 would like to turn the call over to our CEO, Ajay Banga.

Thank you, Barbara.

Good morning, everybody.

As usual, before Martina get into the details of our financial results, I thought I would give you some of my thoughts from another level of looking at our business.

In the fourth quarter, we reported net revenue growth of 10%, and that is really 12% after adjusting for currency.

That drove operating income growth of 18%, which excludes last year's special item for the litigation charge, and a reported EPS growth of 21%; or FX adjusted, that EPS growth is 24%.

So this quarter completed a solid year, with performance in line with our expectations.

For the full-year 2012, reported net revenue grew 10%.

That number FX adjusted is 13%.

The primary drivers of this were processed transaction growth rates that reached the mid-20s, as well as annual GDV and cross-border volumes in the mid-teens.

We also delivered a reported EPS growth of 18% for the year, or 22% FX-adjusted.

So now let me talk a little bit about the global environment, and I know that's on everybody's minds.

Let's start with the United States, where we continue to see a mixed economic picture.

The economy was a bit choppy in the fourth quarter, with Hurricane Sandy and the fiscal cliff debate negatively impacting both consumer confidence and retail sales.

Consumer confidence levels actually declined 11% over the quarter.

And our SpendingPulse data showed that retail sales growth, ex auto, decelerated each month from October through December.

For the quarter as a whole, retail sales growth, ex auto, was up 3.9% over the prior year from 4.2% in the third quarter.

So you can see that trend between the third and the fourth quarter, and within the fourth quarter the monthly growth rate was decelerating.

However, there were also some positive trends.

So in December, consumer spending increased in eight of the 11 retail sectors that we track in SpendingPulse, with the strongest growth continuing to come from furniture, hardware, etc associated with what we've been saying for a while was the rebound in housing.

But this December, lodging and restaurants also showed strong growth in sales.

Unemployment rates have remained steady, although this morning's picture does show an increase -- this is the fourth quarter we are talking about.

And we continue to see improvement in the underlying housing market.

So any optimism that we have about the economy, however, will be tempered until we see what happens to consumer confidence and spending once these fiscal policy issues are addressed over the next few months.

All in all, Q4 was worse than Q3 in terms of the market, in terms of consumer spending and confidence in the United States.

And despite that, MasterCard's fourth-quarter US GDV growth was 7%, which kind of is the same as what we had in the third quarter.

Let's go to Europe.

As you know, the region's economic environment is complicated.

It is probably going to remain that way over the next few quarters.

Looking first at the UK, where SpendingPulse data actually showed the year's strongest retail sales growth occurred in the fourth quarter, 3.8%, and consumer confidence levels have improved over all these four quarters, the last four.

However, the UK economy as a whole contracted in the fourth quarter, and for all we know, it may be headed for another small decline in the first quarter.

If that were to happen, it would make it the third time that the UK has had a technical recession since 2008.

So we expect UK consumers to remain cautious.

It is still not clear to me whether the positive spending and confidence strength will continue into 2013.

But the fourth quarter was interesting and a good surprise.

Looking across the Eurozone, consumer confidence declined slightly, business sentiment remained weak in the fourth quarter, and as you know, Northern Europe still is in a different position from some of the impacted countries in the peripheral markets.

But having said all that, reflecting on how this picture impacted us in Europe, we saw solid GDV growth in the mid-teens, similar to the rest of 2012, driven by the relatively stronger economy that I just said of Northern Europe, but also Eastern Europe, with Poland and Russia continuing to be key contributors.

We also saw, as I said a little earlier, thanks to what happened in the UK, we saw an acceleration in volume growth for the UK in the fourth quarter as well.

In Asia, business and consumer sentiment is mixed across the major markets, because after all, economic uncertainty in the two largest consuming markets of the US and Europe will have an impact on the region.

But looking ahead, however, there may actually be cause for optimism.

China's GDP growth is projected to increase this year over the number of last year.

And frankly, because of its size, that could have a positive effect on sentiment across the rest of the region.

For our business in APMEA, in AP/Middle East/Africa, fourth-quarter GDV processed transactions and cross-border volume growth, all of them increased more than 20%.

Countries like Australia, China, India, South Africa, all contributed to that growth number.

So now let's talk GDP in Latin America.

Annual 2012 GDP growth estimates in some of the key markets there, like Brazil and Mexico, as you know, were revised down in the fourth quarter, when Mexico as it is always getting impacted by US economic conditions -- you know, 70 odd percent of Mexico's GDP comes from in some way a connection to the United States.

In spite of that, consumer sentiment across most of the regions increased.

Our own fourth-quarter GDV and transaction growth was in the mid-teens, actually a slight decline over what we saw earlier in the year, but Brazil, Mexico and Venezuela remained key contributors to our growth.

So given all this, overall, we've still got a cautious outlook going into 2013.

There is going to be uncertainty in Europe, the US could well be on a path for a slow recovery, but the fiscal policy discussions and circumstances have not been completely resolved.

They could affect consumer confidence further.

That would impact spending for at least the first half of the year.

In the meantime, we will continue to maintain our focus on the execution of our strategy, which, as you know, is the displacement of cash around the world, supporting financial inclusion and also obviously driving to gain share in the electronic payment space in the 15% of retail payments that are already electronic.

So some highlights from our recent business activity.

We said a couple of times now that US consumer credit is an area where we need to place more focus.

As you know, our business is not one that turns on a dime; it's got long lead lag times to sell-in.

But we've got some new recent wins in this area.

So the first one is we've had a good relationship with the InterContinental Hotels Group in other regions.

We've just announced now a new multiyear agreement for the United States that names MasterCard as the exclusive payment brand for the InterContinental Hotels Group consumer credit portfolio, as well as actually, even more interestingly, a broad range of marketing, loyalty and innovation initiatives.

That's the first one.

Second one, Bass Pro Shops.

You probably know of them.

They are one of America's premier outdoor merchandise retailers.

They will be converting their co-brand card portfolio starting in the middle of 2013 to us from a competitor.

In the fuel sector, first, we just renewed our agreement with Shell for their consumer co-brand card program.

That's good.

But in addition, we've just had another interesting opportunity in this space and we've become the exclusive payment partner for the Fuel Rewards Network loyalty program.

So when consumers link any MasterCard card to this program and make everyday purchases at a participating grocery store, restaurant, online merchant, they get extra discounts on gasoline purchases at Shell stations.

And this is in addition to the Shell co-brand card which I just talked about.

So that is kind of two things in the fuel space.

And in November, KeyBank agreed to extend the exclusivity we have on their debit and prepaid programs to now include new issuance for both their consumer credit and commercial credit portfolios.

So as you know, last year's announcement of KeyBank was we added Maestro PIN debit capability to their debit and ATM programs.

We also signed them up for our IPS solution for their debit and prepaid transaction processing.

So this is really onto their credit side now.

Last quarter SunTrust, launched a new portfolio of platinum and world consumer credit MasterCards, which are being made available through online, but also through their branches.

So that is some movement in that space.

Moving north to Canada, we announced the launch of the Royal Bank of Canada, RBC/Target co-brand MasterCard credit card program.

The card is going to be available online, and of course in Target stores, as they open new locations across Canada in the first half of 2013.

It kind of mirrors the REDcard loyalty program in the US, which as you know, is co-branded by a competitor.

And this reinforces our leadership position in co-brand programs across Canada.

We kind of added Target to a list of major merchants there with whom we've got successful partnerships, Wal-Mart, Hudson Bay Company, Loblaw's, the whole lot.

Continuing our momentum in the US commercial space, we expanded our existing agreement with US Bank to include exclusivity for their Fleet and Aviation card programs.

This agreement also includes our EMS, that's Expert Monitoring Services, fraud monitoring product and MasterCard's Payment Gateway for segments of their corporate and purchasing card programs.

In 2012, US Bank actually became one of our top 10 commercial card issuers with all the partnerships we are doing with them.

We are continuing our work with governments and other partners to support financial inclusion for the underserved.

So let me highlight a few examples from Africa.

I've actually just come back from a trip to Kenya, Nigeria and South Africa.

When I was there two weeks ago, we announced an agreement with Equity Bank in Kenya, one of East Africa's largest financial institutions.

We are going to be putting 5 million EMV debit and prepaid cards in the market over the next 18 months.

That is probably one of the largest deals of that size in the African continent.

The rollout is expected to expand to Uganda, Tanzania, Rwanda and South Sudan, which will make it the largest rollout of EMV payment cards in sub-Saharan Africa, where, by the way, 80% of the population is unbanked.

And that is the target that Equity Bank has.

They aim for that segment of the population.

That is their history.

Last quarter, we launched a collaboration with Comviva Technologies and Tutuka to extend financial inclusion for millions of people across Africa.

Operators providing mobile money services will be able to offer prepaid cards or virtual card numbers linked to a stored value account, and so then they can make purchases at any merchant that accepts MasterCard.

They also will be able to use the service to pay bills, do fund transfers, all the things they would like to do, given the circumstances of that market.

Initial focus is African countries, like Kenya and Nigeria, where Comviva is selling or has sold services with Airtel.

We've also been working with the Central Bank of Nigeria and the federal government, with whom I met on this trip to modernize the payments industry and introduce acceptance training workshops, highlighting the benefits of accepting electronic payments for merchants.

Our Advisors team joined with the Central Bank of Kenya, whom I also met on this trip, to develop policies to support the modernization of Kenya's retail payment system.

The Central Bank's policies are basically focused on increasing efficiency and encouraging interoperability, rather than siloed payment improvements, improving safety and increasing financial inclusion through the greater use of electronic payments.

So that's what's going on there.

On the mobile front, we are driving ahead of our efforts to develop partnerships with mobile network operators and other companies.

And it's interesting, just as I was putting this number together, we have 25 initiatives around the world in just the past two years, and not counting what we were doing earlier.

In just the past two years, 2011 and 2012, we have 25 new initiatives.

So let me give you two examples of what is going on in Brazil in this space.

You know we talked in November 2011 of the joint venture with Telefonica.

We announced the next phase of the JV with the rollout of a mobile prepaid product in the second quarter.

Consumers will be able to load money to their mobile prepaid account, make purchases, conduct P2P payments, phone top-ups and other financial transactions with their mobile phones.

They are also going to be able to load cash to that account at designated refill locations, which are broader than just the Telefonica store; it includes grocery stores and newspaper kiosks.

And now we've partnered with TIM, the second-largest mobile network operator in Brazil, and Caixa Economica Federal, which is a bank-issuing partner of ours, to launch a mobile money program in Brazil for TIM's 69 million subscribers.

So these two partnerships combined in Brazil will help us to serve almost 150 million mobile phone subscribers, which is about 60% of the Brazilian mobile market.

So let's talk prepaid.

A couple of wins that we've had for the US and Europe, which I can talk about.

MasterCard will become Aetna's preferred payment brand for their healthcare flexible spending accounts, health savings accounts and prepaid stored value cards, such as their Aetna ValuePass card.

So these plans will help consumers, as you know, to access money in an account usually attached to a health plan to pay for eligible healthcare expenses with pretax dollars.

In Italy, we recently announced a deal with ENI, which is one of Europe's largest oil companies, to replace their loyalty card with MasterCard branded, PayPass-enabled prepaid and credit cards.

So cardholders will be able to collect loyalty points when shopping at ENI outlets or at any other location around the world where MasterCard is accepted.

ENI is planning to install PayPass terminals in their gas stations and coffee shops, which is great news for us, because that will make them the largest PayPass merchant in Europe when they complete this.

By the way, we are now up to about 700,000 PayPass outlets around the world, up from the 400-odd thousand that we had at this time last year.

So this is all part of what we're trying to do with that whole space.

So now, let's talk China and the Middle East for affluent travelers, which I think will also help us enhance our cross-border business.

Let me give you a few examples.

The Bank of China launched a six-month program to drive cross-border transactions using our MasterCard Reward Services platform.

Bank of China MasterCard cardholders are earning credits for up to 10% of their purchases when they shop at luxury stores, which as you know is a good way for the Chinese to spend money, such as Louis Vuitton, Cartier, Prada, Hermes in the UK, in the US and Canada.

In Bahrain, Al-Baraka Bank and Nonoo Exchange launched the first platinum prepaid card in that country.

The card offers access to events and destinations and there is merchant-funded discounts, shopping privileges and all other kinds of premium experiences that make sense in the Bahrain market.

In the UAE, we recently launched Gocash with the UAE Exchange, a leading regional remittance and exchange house.

So Gocash is the Middle East's first six-currency prepaid travel card.

So consumers can load up to six currencies and lock down the value of their foreign currency in advance of their travels.

So that is kind of what is going on around the world.

And let me turn the call over to Martina for the detailed update on our financial results and all our metrics.

Martina.

Thanks, Ajay, and good morning, everyone.

Let me begin on page three of our slide deck, where you will see the as-reported growth numbers, as well as the FX-adjusted growth rates.

And all of my comments on this slide will pertain to the FX-adjusted figures.

So we are very pleased with our performance this quarter, especially given the tough comps that we were up against the fourth quarter of last year.

Net revenue grew 12%, driven by volume and transaction growth, which also reflects the impact of the deals that we have signed over the last year.

Operating expenses grew 4%, and together with net revenue growth, resulted in net income growth of 21%.

And EPS growth of 24% also benefited from our share repurchase programs.

Cash flow from operations was $866 million, and we ended the quarter with cash and cash equivalents and other liquid investments of about $5 billion.

During the fourth quarter, we purchased about 1.3 million shares at an approximate cost of $613 million.

Through January 25, we repurchased an additional 322,000 shares at a cost of about $165 million, and we now have $440 million remaining under the current authorization.

We will continue to look to repurchase shares on an opportunistic basis.

So let's first talk about the operational metrics for the fourth quarter, and here we will start on page four.

Our worldwide gross dollar volume, or GDV, was up 14% on a local currency basis.

In the US, GDV grew 7%.

Debit growth in the US remains solid at 11%.

And credit volumes in the US grew about 2%, with commercial credit growth up from last quarter in the high teens.

US consumer credit improved slightly versus the last quarter, but as Ajay said, it is not where we want it to be, and we will keep working it.

Outside of the US, volume growth was 18% on a local currency basis, and this continues to be driven by more than 20% growth in APMEA and mid-teens growth in Europe as well as in LAC.

Cross-border volume grew 17% on a local currency basis, including high-teens growth in LAC and more than 20% growth in both Europe and APMEA.

Let me turn to page five, and here you see our processed transactions were up just over 20%, and that is our sixth consecutive quarter of 20%-plus growth.

As expected, we continued to see a deceleration, which was mainly driven by the full lapping of our processing win in the Netherlands, as well as some lapping of US debit wins.

So let me drill further down into the numbers, and a little less than half of the 20% growth comes from new PIN debit transactions in the US, leaving about 12% as the underlying growth rate, very similar to the last couple of quarters.

Globally, the number of cards grew 8% to 1.9 billion MasterCard and Maestro branded cards.

Let's now turn with this background to page six, where you can see both the fourth quarter as-reported and FX-adjusted growth rates for each of our revenue line items.

So let me just comment on a couple of these categories.

Domestic assessment grew 9%, while worldwide GDV grew 14%.

The gap between these two growth rates is five percentage points, of which two percentage points is foreign exchange, and the remainder is driven by relatively higher growth of ATM volume in emerging markets.

On cross-border volume fees, they grew actually 14%, while cross-border volumes grew 17%.

The primary reason for this difference is a higher proportion of intra-Europe activity.

So that really means Europeans stayed closer to home and the resulting spend came with a lower revenue yield than when they travel outside of Europe.

Transaction processing fees grew 15%, driven mainly by the 20% growth in processed transactions.

Narrowing considerably from recent quarters, the gap between these two growth rates can be attributed to US PIN debit transactions that come with a lower-than-average revenue yield.

Only a small portion of the gap is explained by foreign exchange.

And finally, the distribution of rebates and incentives followed relatively the same pattern as last year, with fourth quarter representing slightly less than 30% of full-year 2012 total rebates and incentive amounts.

Let me move to page seven, where we've detailed the as-reported and FX-adjusted growth rates for our expense line items.

So within total operating expenses, you see the increase in G&A expense was primarily driven by the impact of increased salary costs as a result of hiring more people to support our growth initiatives.

We ended 2012 with approximately 7500 full-time employees.

The net impact of foreign exchange activity was also a factor in the G&A increase, primarily due to balance sheet remeasurement.

The decline in advertising and marketing expense was primarily due to the non-recurrence of certain promotions.

So let me turn now to slide eight, and let's discuss 2013, starting with an update of what we have seen for the first quarter through January 28.

Globally, our cross-border volumes grew about 18%, and that is just slightly higher than what we saw in the fourth quarter.

This was primarily driven by higher growth in our APMEA and LAC regions.

In the US, our processed volume proxy for GDV grew 6%.

That is just a bit lower than our fourth-quarter growth, primarily due to the lapping of some debit wins.

We did, however, see a slight increase in our consumer credit growth.

Processed volume growth outside the US grew 15%, which is a bit lower than what we saw in the fourth quarter.

And since all of you have a keen interest in Europe given the economic environment there, our processed volume growth there was mid-teens, similar to what we saw in the fourth quarter.

Globally, processed transaction growth was 17%, down from the 20% we saw in the fourth quarter, mainly driven by the full lapping of our Netherlands processing wins, as well as some lapping of US debit wins.

As a reminder, with the April 1 anniversary of the US regulatory change relating to debit card non-exclusivity, we expect a deceleration in our processed transaction growth rate for the rest of 2013.

So looking forward, let me just start first with our long-term performance objectives.

We remain confident that our business can deliver an 11% to 14% net revenue CAGR and at least 20% EPS CAGR over the 2013 to 2015 period.

These growth rates are on a constant currency basis and exclude any new acquisitions.

We also remain committed to our annual operating margin target of at least 50%.

And as we first told you at our Investor Day last September, based on our current expectations of the economic environment, we expect that net revenue and EPS growth in the early part of this three-year period might be slightly below the 11% minimum threshold for net revenue growth and 20% for EPS growth.

In later years, assuming the world returns to a more stable environment, we believe net revenue growth could be at the higher end of the range, and that could also benefit EPS growth in that particular period.

Just one other comment that I would like to make about our EPS CAGR objective, which we said was based on a normalized tax rate that excludes the impact of several one-time benefits that we were able to achieve in 2012.

Our 2012 normalized tax rate is 31.8%, and that will result in a pro forma EPS of $21.44, which becomes the base on which you should be modeling EPS growth beyond 2012.

Now, I would like to share with you a few specific thoughts about 2013.

Given the current economic backdrop that Ajay just discussed, we expect net revenue growth in the first half of 2013 to be below the 10.7% currency-adjusted rate that we saw in the second half of 2012.

Additionally, the tough comparison to the very strong growth that we had in the first half of last year is a factor in our outlook.

Given our investments in initiatives such as mobile, eCommerce and information services, our total operating expenses will continue to grow, likely just a bit below the 8% currency-adjusted growth rate we saw in 2012, with more money being put to use in all of the expense line items.

Therefore, we may be able to deliver some operating margin expansion in 2013.

The amount of any improvement will depend on both top-line growth and investment opportunities that may surface during the year.

For modeling purposes, you should assume a full-year tax rate similar to our 2012 normalized tax rate of 31.8%.

With respect to foreign exchange, assuming the euro continues to trade at the 1.35 level and the Brazilian real at the 2.00 level for the rest of the year, we would expect about a 1 to 2 percentage point tailwind to as-reported net revenue, net income and EPS growth for full-year 2013.

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

Thank you, Martina.

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

John?

(Operator Instructions) Craig Maurer, CLSA.

Regarding your comments on European cross-border seeing increasing activity in intra-EU, is this a trend you expect to continue through 2013, and should we see the applicable yield also decline with that?

Thanks.

Craig, it's tough to say.

This has happened over the last two years a couple of times, when if you go back through our earnings calls, you will find there were quarters when Europeans tended to travel within Europe.

I think a lot depends on their feeling of confidence.

My sense, as you look at January, most of the cross-border growth, as we've talked about -- Martina was very careful to say it has come from Asia Pacific, Middle East Africa and Latin America -- because this European issue hasn't really completely changed in January.

So I don't know yet, but I'd say that it kind of goes through its ups and downs.

It's probably a fair question which I don't have a good answer for.

Thank you.

Jason Kupferberg, Jefferies.

Just wanted to ask a question here.

In the US, with the EMV -- the first EMV milestone coming up quickly in April for the acquirers, and then of course the liability shift planned for October of 2015.

There seem to be some outstanding questions regarding how EMV will be made compatible with the multiple debit network provisions of Durbin, so curious if you think the April deadline will hold?

And then -- could that have any impact on the October 15 target timelines, as well?

Obviously, the banks and merchants still have a lot of work to do to become EMV-compliant, and we've seen in other countries planned timelines obviously shift to the right.

And then can you just also, in conjunction with that, comment on whether or not there will be any material difference in your network economics in the US once EMV and Chip-and-PIN, if it goes Chip-and-PIN, actually becomes reality?

So the second one first.

I'll repeat that from past times.

We do not expect a material impact to our economics, just because that hasn't happened elsewhere where EMV exists, and that is kind of what we have been saying two times.

And my thinking on that hasn't changed.

The first one, when we started this whole EMV journey, we have said many times over that it is possible that they won't meet their deadlines.

But we put these deadlines together, together, meaning through a consultative process that involved acquirers, issuers, merchants and us.

And that is how we did it differently from some of the other forces out there.

I think we therefore feel we are in it together, we are working with them.

You know that we recently announced that we are willing to do an open API on our EMV so that the regional debit networks can also be allowed to be enabled to participate without having to build all their own technologies, which may take a long time.

So we are trying our very best to be flexible and thoughtful and take all the ecosystem players along.

But that is how we are planning for it.

I have no way of saying will October become December or will some other trend move.

But I've got to tell you, our discussions are pretty productive, and the announcement of that open API was greeted with enthusiasm by a number of the players, because it gives them the chance to meet deadlines and schedules and be a player in the game.

Rod Bourgeois, Bernstein.

Yes, a couple questions about what is happening in Europe from a regulatory standpoint.

I just wanted to start with the comment about your revenue yield on cross-border transactions in Europe being held back by more travel actually occurring within Europe.

So does the lower yield on intra-European transactions have anything to do with the temporary interchange rate caps that you have in Europe, which could be holding back your pricing or your revenue yield in Europe?

And then if that is a factor, looking forward, do you agree that Europe is prone to pass regulation that might include permanent interchange rate caps for cross-border transactions over there?

Would love the comments on the European dynamics.

I'm going to take your first question.

First of all, as we have said a number of times, there is absolutely no impact from what is happening from an interchange environment on what is happening on our fees.

As we have seen a number of times over the last few years, many, many times, from time to time, depending on how the European economy unfolds, Europeans are staying closer to home.

And to justify the effect in terms of how our cross-border fees are set up in Europe versus when Europeans are actually traveling overseas, that is where you see it a change on our yield.

But it has absolutely nothing to do with the regulatory environment.

At the end of the day, they are also spending in the same currencies, so we have that issue as well.

You don't make the money you would make, either the issuing banks or us, on the FX.

There is a lot of reasons, Rod; it is not the reason that you may otherwise think.

It is actually logical that you will get a lower yield because of the way those fees are set, as well as the FX.

As far as Europeans being prone to passing regulations, boy, that is a politically great statement.

But you know better than I do that they love passing regulations.

It is just a reality.

I don't know what to do about that as an answer.

Other than to tell you that they will, no doubt at some point of time, do something.

Because they have said that in the second quarter of this year, they will likely publish some legislation on interchange.

What we have been doing with them is to take a thoughtful approach on legislating interchange, and to make sure that if they are still serious but continuing vigorous competition in the EU payment market, which, by the way, I think is a very competitive market, any interchange regulations has got to be carefully weighed against the now-known consequences of reduced rates.

We've seen in it Australia.

We haven't seen the benefit of lower pricing in the US going to anybody, certainly not at a gas stations.

So in addition, a level playing field between open four-party schemes and closed third-party schemes has got to be ensured if they want to be fair in the legislation.

So there is many aspects to this.

Will they pass legislation?

Yes.

Will that dramatically change the industry?

I don't know.

But we've been through these steps earlier.

And we are working with them in a constructive way to help inform them while they keep in touch with us.

So we're all in it together, us, the banks and the merchants in Europe.

I still think there is an enormous amount of opportunity in Europe, just given the quantum of cash in those economies.

Germany is still 80% cash.

Just one number, Germany itself.

Forget -- before you get to the Italys and Greeces of the world.

So yes, this will happen.

It's one of the things we've got to deal with, but we are dealing with it.

And Ajay, could you have some more domestic processing wins in Europe in the hopper, just to complete the European picture?

If it was in the hopper, I wouldn't tell you, Rod.

You know that.

But yes, that is definitely part of the strategy.

Absolutely.

100% part of the strategy.

SEPA and the payment systems directive allowed us to play that game, as you know.

So within it -- it is just that you get portions.

In fact today, we see domestic processing transactions in most of the European countries which we did not see just three or four years ago.

So we are at different stages of opportunity in different countries.

It takes a little time.

And we are kind of growing along as we go.

And it is not a bad way.

We are 50-something percentage points up over the previous period on our European domestic processing number.

That's a good thing.

But it is off a smaller base than what we have in the US and in Brazil.

Operator, can we go to the next caller, please?

Sanjay Sakhrani, KBW.

Thank you.

Good morning.

I've got a question on the US credit card market for Ajay.

You've talked about some of the impacts related to the mix of your customers which may have led to underperformance over the past couple years.

But do you feel like when the tide turns, you might see the opposite, and kind of how close are we to that?

Thanks.

Great question.

I don't know how to answer that, other than -- let me put it this way.

I don't know how close we are to the tide turning, because that is why I am uncertain about the US economic situation.

I genuinely believe that over a period of a couple of years, the United States has the opportunity to surprise people on the upside, just given how much restructuring in the economy has happened over the last two or three years compared to some of the economies overseas.

But you know, the whole picture hasn't come together.

Yes, some restructuring has happened, but the regulations are still complicated.

We've got moving parts on the fiscal policy.

We've got consumer confidence -- I mean down 11% in one quarter, this surprised me.

So those are the kind of things that I don't know where the US will go.

Until all those forces align, you can't see the North Star being the revival of consumer credit, if you know what I mean.

But there is stuff going on.

Housing is picking up.

Sectors related to housing are picking up.

The other part of your question, the part about our mix of customers, it's kind of the business we are in.

So we get a lot of business from some customers who got more impacted in the downturn.

They are still to come out of it.

You can look at their own results and you can make your conclusions from that.

But from what I see of what they are doing, they are doing some very intelligent things as institutions to help revive their businesses.

So when they do revise, yes, absolutely I will also get an opportunity to ride their revival.

But I don't know when that will be because I am not party and privy to what they are up to inside.

I just see what I see.

So you see as much as I do, more or less, on that one.

That is the part I don't know how to answer.

In the meantime, what I am trying to do is to diversify my customer base in the US, and that is what takes time.

But I have over the last year or two won a number of deals in the independent bank and credit union and regional bank spaces, and those are helping.

They are very, very helpful.

We are building new partnerships and new friendships along the way.

And we are looking at the right co-brand portfolios, whether it be Bass Pro or the Shell and the Fuel Rewards Network, and there are others like those in the hopper.

Thank you.

David Togut, Evercore Partners.

Thank you and good morning.

US commercial credit continues to drive most of your GDV growth.

David, could you speak up just a little bit?

We are having a hard time hearing you.

Okay, can you hear me now?

A little (multiple speakers).

Go ahead.

You were saying something about US commercial credit.

Yes, so US commercial credit continues to drive most of your US credit GDV growth.

Visa has made a lot of investments in their US commercial credit platform, even though they were really years behind MasterCard.

Do you see the competitive battle with Visa changing a lot in US commercial credit over the next couple years?

And what do you see as your main competitive advantages in this area versus Visa?

I always think of all the competitors in that space as being relatively good at what they do.

It is a well-served market, both by AMEX and Visa, quite frankly.

We all do a decent job.

In many ways, I think our assets hadn't completely been honed at the front end of our business to give us the results that we are now beginning to get by realigning those assets.

In the meantime, we've put money into improving a number of our assets over and beyond what we had, let's say, a couple of years back.

So we've got a new version of SmartData out there, which is one of the reasons we win these deals, and that new version is actually even superior to what we had earlier.

So we feel relatively good in that space.

And vis-a-vis other competitors in the space, if you travel outside of the US and you do not only go to certain countries where you can go to the five star hotels and the bigger restaurants, I continue to make this point, that it just takes a few people in that company to have an unfortunate experience where their card is not accepted or doesn't work for that company to feel the need to empower their employees with the cards that work everywhere.

And that helps us win our deals.

We believe that the power of our acceptance is superior to that of others.

And so between different competitors and different advantages and disadvantages vis-a-vis us, my sense is between SmartData, between the aspects of the acceptance and then all that we do with our small-business rewards and all the activity in the commercial card space, I continue to feel that we've got some runway for growth here for a little while.

Now, I don't know whether the numbers will be as high as they've been in the past year or two.

Who the heck knows that?

But I am pretty confident of our advantages and our product portfolio.

Thank you very much.

James Friedman, SIG.

Thank you for taking my question.

Since it is topical this week and this month, I just wanted to ask about the introduction of fees related to the merchant litigation settlement, specifically, some of the surcharging that you might be seeing, if any, at this point.

Thank you.

Not seeing anything new.

Just happened on the 27th, and so it has been three days, and I don't know that anybody has done much in that space.

But we've -- remember, first of all, a number of states in the United States do not allow this, even if the settlement provides for it.

So that is kind of one thing that you have to factor in.

There are 10 states that don't allow it, but they also represent a larger percentage of the transactions just because of the nature of those states.

But beyond that, all I know is what I've seen elsewhere.

And I'm kind of using that to inform my thinking now.

Every market is different, and the United States is different.

But if you think about the UK or Australia or other locations where surcharging has been going on for some years, I've seen it start in some ways, fizzle out in others, continue in merchants where their competitive position allows them to do so -- online ticket sellers for airlines, for example, and so on.

It could well happen, but it doesn't really go to a very large extent because of the obvious consumer dissatisfaction.

I mean, that's the reason the rule was enacted in the first place.

So it is that idea.

But in the settlement, it is allowed.

On the 27th, they could go ahead.

I'm sure there are a number of them considering it and doing it.

Even before it started, there were discounts being offered for cash vis-a-vis cards in a number of merchants in the US.

So I think the picture isn't as clear as some spreadsheet would give it out to be.

It is a little murky.

But that is how I think about it.

I think over 6, 7, 8, 9 months, depending on where this whole litigation goes with the court and the opt-outs and the like, that is when you will be able to see where really this is going.

I doubt you will see a great deal in the early part of these days.

Thank you, Ajay.

Bryan Keane, Deutsche Bank.

Just wanted to ask about the move to EMV Chip-and-PIN.

I assume that's going to impact your debit yields since the likely move to PIN will drive lower US debit revenue.

So I guess just thinking about the strategy, how do you plan to offset that debit yield revenue loss?

And then second question for Martina.

The pickup you expect in net revenue growth in the range after 2013, I think you said to even potentially the high end of the range, is that purely economic driven?

I'm just trying to gauge your visibility there.

Thanks.

Let me take both of them, because we just had the question in terms of whether the move to Chip-and-PIN is actually impacting our economics, and Ajay had said no.

When we look really at other markets where we had introduced EMV over a number of years, it really does not impact our economics.

Every market is obviously different, but we really don't expect anything differently in the United States.

In terms of the net revenues moving potentially higher, in the higher end of the range beyond 2013.

Yes, it is exactly how we laid it out at the Investor Day conference back in September.

The one variation that we always have to deal with is really what is going on in the economy.

And as you know, we are really relating that to a growth in personal consumption expenditure.

And we do believe that in the early part of the range of the 2013 to 2015 period, that really the personal consumption expenditure is a little lower than what we have seen in the last few years.

And hopefully, as the world normalizes, that will move up.

So it is only that one particular impact.

It is not the other drivers that drive our revenues, which is basically the secular trend, in terms of conversion from cash and check to electronic forms in payment, nor what we are thinking in terms of participating more in that 15% share that is already converted to electronic forms of payment.

So, Bryan, think of it this way.

When we make targets for these years out, we kind of look at all the factors obviously that change our revenue, one being the PCE, which Martina just explained.

We think the early part of these years may be tougher just given what the economic environment is.

I actually think the first half of 2013 will actually be tougher than the second half, let alone out into 2014, just given what is going on in the US and Europe.

But once you get past that, we are doing a bunch of things strategically to grow more share in the 15%.

We are doing things to participate in the 85%; all that is factored into the numbers we gave you.

The only variable that we see changing, which is driving the guidance we are giving you, is what we think about economic growth.

The others, we are still plugging along.

We are putting our money into the strategy.

We are doing things to grow our business.

We are doing things in mobile.

We are doing things in prepaid and commercial, in credit, in debit, in biometrics, in financial inclusion.

That has not changed.

It is the response from the PCE that really Martina is referring to.

The second little stratification you might think about is - Let me give you one of the many reasons why EMV technology implementation doesn't equal diminution of economics.

Think of the many transactions that don't work on a single message format.

Let me give you -- for example, where the final amount of the transaction is not fixable at the time that the transaction is authorized, which, by the way, are some of the most interesting transactions.

You leave a tip at a restaurant.

You had a $300 bill; you are going to put $35 hopefully, or $50 or $20, depending on where you are in the world, on the tip.

That entire transaction doesn't go through a single message.

That's a little different.

You stay at a hotel.

You use a rental car.

Those are all different transactions to just the ones that go through very easily on single message.

So EMV, what it really does, it is a card authentication methodology.

It tells you -- when that card goes in, there's a dynamic encryption on the Chip that says that it's a real card; it is not one that has been counterfeited or compromised.

So that is what it is about.

And that is why I would encourage you to think about this a little differently from, oh, my God, that just means everything is going to hell in a handbasket due to Chip-and-PIN.

We've had 20-odd years of experience of doing this in Europe and Asia, and so we've got some history behind us when we are telling you this.

I hope that helps, Bryan.

That helps.

The confusion always is that the debit market has two different yields for signature and for PIN.

(multiple speakers).

That's got a lot to do with the nature of debit as a business, where you are really -- in fact, if you think about outside of the US, it doesn't have such a wide spread between signature and PIN.

The US had a development of pattern, where signature debit went all the way to signature credit, and that is what led to the Durbin legislation.

So it is sort of a self-fulfilling issue.

I actually think that debit per se being the money of the consumer has a different profile, in being direct access from the bank has a different profile in terms of the risk profile for the merchant, the risk profile for the issuer, and therefore, the interchange is today going to a lower level than it did in the past.

Okay, helpful.

Thanks.

Glenn Fodor, Autonomous Research.

It's Glenn Fodor, Autonomous Research.

Thanks for taking my question.

Ajay, reports that debit issuance is beginning to gain momentum in some parts of your APMEA segment.

What is the story here for gaining more volumes?

Is it just winning new issuing business, or do these countries have local government bank-backed debit schemes that you will have to compete with, similar to Europe, and that could impact your growth rate?

I didn't hear the first part when you started out.

I heard the second part.

You said something is growing in Europe and you went in and out on me.

I'm sorry.

I'll switch to the handset.

There has been some reports out there about debit issuance is gaining momentum in some parts of Asia Pacific, Mideast and Africa segment.

So what is the story for gaining volumes?

Is it just winning new issuers, or are there are debit schemes, like there are in Europe, owned by the banks (multiple speakers) and things like that?

Got it.

Got it.

That's a great question, Glenn.

It is going in different ways.

There are a number of countries around the world where there are local debit schemes, but unlike the way Europe originally developed, when those debit schemes are mandated to be the only ones, and nobody else could compete.

In most of these countries there is actually competition between a local debit scheme either run by the government or run by the local banks and us -- in most of them.

Not true for all, but in most of them.

So what we are trying to do is to try and be sensible about all those opportunities and play there.

And so you know that we only see something like 50% of our processed transactions around the world through all these reasons of the kinds of schemes you are talking about.

But that number has been growing, thanks to SEPA, thanks to work we've done in Brazil, thanks to work we are doing in a number of countries around the world.

But you know, this is a continuously moving issue.

And most of the emerging market countries, as they see the value of payments in electronifying their environment and country, they are more and more headed down the path of saying, let's make sure that we have some control of the payment environment.

So you've got to deal with them and play with them.

And a number of them, they are even trying to white label what we do to help them set up their payment network so that they are embedded in where they are.

And it is not just us doing it.

It is others doing it, too.

So all of that actually is great, because what it is doing is it is driving the move from cash to electronic.

And I tell you the opportunity in places like Africa -- this trip this week in Africa just reinforced everything.

In December, I was out in Myanmar, and of course in the developed economies of Asia.

But you go to Myanmar, and you see the opportunity.

It is not today.

Maybe my successor will get a great deal of benefit out of Myanmar.

But I tell you, for the next 20 years, you can see the opportunity, if you do this systematically, with technology, with careful local governments and being sensible about the role we play.

And that is what we are trying to do.

Thanks, Ajay.

Appreciate it.

Ken Bruce, Bank of America.

Thanks.

Good morning.

My question really develops on a couple of the other questions and answers that you provided, specifically around the secular growth potential.

I'm wondering if you are seeing any changes to that aspect of the growth potential.

If you just look at the last couple quarters, obviously the economic backdrop has been quite low and has been creating headwinds, yet you continue to grow through that.

I'm wondering is it that you are seeing the secular potential accelerate here to the upside, or if it is more the market share wins that is essentially driving that growth.

How do you see that playing out?

And I have a follow-up after that.

I don't think the secular growth potential has yet all the work we are doing.

Think of the mass we are dealing against.

We launched 5 million cards in Kenya.

That's interesting.

But there is like hundreds of millions of people in Africa.

When you do 10 million South African Social Security benefit cards, that's interesting, but there are 60 million people in South Africa alone.

So what happens is that you make dents in the system, but as you make the dents over a period of time, it accumulates.

It is also interesting that the emerging world and the developed world are kind of moving around in terms of their PCE growth.

So what is happening is with the emerging world growing faster, and with their PCE growing faster, but the their level of electronification being lower, when you weight the whole thing together, the damn thing still looks like 85% cash and 15% electronic, even though it isn't that way if you go by country.

There is a change happening in the emerging world that is pretty quick, but the total number doesn't change.

So I don't know yet.

I think that is what we've got factored in, and the guidance we've given you is what we see today in that secular growth.

It isn't dramatically different from the last two or three years.

What drives that is urbanization, globalization, travel, middle-class growth, all the stuff that we all know about.

I haven't factored in huge increases from that in my revenue growth expectations.

If that changes, we will talk to you again.

But right now, that is where we are.

Operator, we have time for one last question.

Julio Quinteros, Goldman Sachs.

Just real quickly, on the cadence of spending, Martina, can you just go through that real quickly in terms of rebates and then also ad marketing through the first half and the second half of 2013?

As you know, the rebates and incentives are all baked in what we said already about revenues.

Right?

I really don't expect any different cadence than what you already had seen in the last year, which was up, by the way, not too different from 2011.

From an A&M spend point of view, I just want to draw you back.

We said total operating expenses of 2013 is expected to be just a bit below the 8% currency adjusted growth rate that we saw in 2012.

And really what you should be taking this in all line items.

So G&A, A&M, as well as D&A will be impacted from that point of view.

So all of those line items, you should be expecting to grow in order to get to this just a bit below 8% on a total basis.

Okay, that's great.

Ajay, of 25 new initiatives that you mentioned in mobile on a global basis, what is the base technology for that?

Is it NFC?

Is it tap-and-pay?

What are you guys looking at?

Good question.

It's mixed.

The NFC tap-and-pay kind of stuff is in a number of the markets.

But actually, what is also doing really well is the joint venture we had with Smart, which uses a basic wallet that allows SMS-based money movement.

That is what Telefonica has.

That is what we are doing with a number of people, TIM.

We are doing it with Turkey with Turkcell, which actually is probably out there the longest and the most effective.

So it is a mixed bag there.

There is both types going on.

And as I've said, I'm trying to put my bets into multiple places in mobile.

Because I think that this thing will develop in different ways, whether it goes NFC and tap-and-go, whether it goes with the SMS, what role the wallets will play.

That is why we are so keen to put our wallet as an open wallet rather than one-way.

We own the consumer.

We want to be seen as the brand, if you will, at the bottom right-hand side of the card for a mobile payment.

So we are not trying to be the brand on any other part of the card.

And that is kind of what our whole perspective is in this mobile space.

So it is a mixed bag of those.

But maybe the next time we meet, we can talk a little bit more about it.

That's great.

Thank you, guys.

Before we sign off, I think, Ajay, you've got some closing comments.

Thank you all for your questions.

And Julio, I hope you don't mind my pulling your leg about your name, but I couldn't forget that when you came on.

So let me leave you with a few closing thoughts.

We just ended a great 2012.

We built off the momentum we had in 2011.

2011 was an even stronger year in terms of financial performance, as you know.

Now, 2012 good performance was good, despite the somewhat unpredictable economic circumstances and these choppy waters globally that we have just talked about.

As you all know, consumer spending and confidence was slower in the second half of 2012 in many parts of the world.

That environment continues as we enter 2013.

We are all very conscious of that.

We are very watchful.

But we are going to keep investing in the initiatives that we see having the maximum potential for our future, some of the things we just talked about, between the call and the questions.

These are not things that Martina and I believe can be turned on and off like a tap.

So all in all, we haven't changed our thinking from what we said to you at Investor Day last September.

We are confident about our 2013 to 2015 objectives.

We do expect performance in the early part of that period to be below the range.

We think growth will pick up as we go along.

As I said a little while back in answer to a question, I continue to believe that the US economy has the potential to outperform over the three-year period, and that will have a salutary effect on global economic conditions.

Meanwhile, our task is simple -- well, relatively simple.

Guide our ship through these waters, stay focused on both growing share in the current electronic payments business, as well as keep investing in driving the conversion of cash through technology, but also through public-private partnerships around the world.

That is what we are trying to do.

So thank you for your participation.

Thank you for your support.

And thank you for being on the call.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.

You may all disconnect at this time.