Source: Seeking Alpha
Mastercard Inc. (NYSE:MA)
Q2 2014 Earnings Conference Call
July 31, 2014 9:00 AM ET
Barbara Gasper – Head, IR
Ajay Banga – President and CEO
Martina Hund-Mejean – CFO
Tien-tsin Huang – JP Morgan
Bryan Keane – Deutsche Bank
David Hochstim – Buckingham Research
Sanjay Sakhrani – KBW
Moshe Orenbuch – Credit Suisse
Jim Schneider – Goldman Sachs
Moshe Katri – Cowen & Co
Darrin Peller – Barclays Capital
Chris Brendler – Stifel Nicolaus
James Friedman – Susquehanna Financial Group
Glenn Greene – Oppenheimer & Co
Bob Napoli – William Blair
Welcome to the MasterCard’s Second Quarter 2014 Earnings Conference Call. My name is Christine, 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, Head of Investor Relations. You may begin.
Thank you, Christine, and good morning to everyone. Thank you for joining us for a discussion about our second quarter 2014 financial results. With me on the call today 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. Even if you think you have already dialed into the queue, 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 our website at mastercard.com. 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 August 7.
Finally, as set forth in more detail in today’s earnings release, I need to remind everyone that today’s call may include some forward-looking statements about MasterCard’s future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our most recent SEC filings.
With that, I will now turn the call over to Ajay Banga. Ajay?
Thank you, Barbara, and good morning everybody. So for the second quarter, we are very pleased to report a net revenue growth of 13%, both as-reported and adjusted for currency. That increase is driven by healthy volume and transaction growth, which resulted in net income growth of 10% as-reported or 9% adjusted for currency and an EPS growth of 14%. And these results include the impact of all the acquisitions that we’ve completed so far this year.
So let’s start with looking at the underlying global economic trends with the United States where the economy seems to be improving but not without some challenges. Our second quarter SpendingPulse data showed U.S. retail sales, ex-auto, growing at 3.8% and that’s a noticeable improvement over the first quarter number of growth of 2.3%.
However over that quarter, the monthly trend decelerated partially as a result of lower gasoline spending, which consumers did not appear to rollover into additional discretionary spend. Having said that, overall we think that current U.S. economic recovery is very much a work in progress. We see some favorable indicators, the continued improvement in unemployment figures, consumer confidence levels and so on.
But in fact early indications for July retail sales, again ex-auto, are showing further improvement over the second quarter. But there are some factors that could weigh on that economic recovery, like the slowing recovery in housing and the improvement in unemployment coming in part from an upswing in part-time workers rather than just full-time positions.
So despite those mixed segments, our U.S. business saw an improvement in the quarter, primarily driven by stronger growth in our consumer credit volume and continued good growth in commercial credit.
Europe. Europe continues a slow recovery path. PCE growth projections remain unchanged for the year at 3.5%. Consumer confidence, economic sentiment, unemployment rates all continue to improve across the region. And if you add to this in the case of the U.K. in particular, our SpendingPulse data showed retail sales, ex-auto, growing by 4.8% in that quarter, one of the strongest rates in the last four years with growth specs evenly across the sectors.
So MasterCard’s total European volume growth for the second quarter was in the low-teens, process transaction growth was in the high-teens, both a bit lower than the first quarter. The region’s growth was driven by number of countries including Russia, Turkey, Sweden and Italy.
In Latin America, full-year GDP growth expectations for the region have been revised down from 2.5% to 2.3% because of slower than expected performance in some of the key countries including Brazil and Mexico. And our second quarter SpendingPulse data for Brazil shows that retail sales grew 4.1%, down from the 5.9% growth in the first quarter. And this by the way is the weakest growth rate since August of last year.
On the other hand, the Mexican economy showed some improvement in the second quarter, and we believe that will continue as the U.S. economy improves. Our business in the region remains healthy, but it has slowed somewhat over the first quarter with second quarter GDP growth in the low-teens and process transaction growth remaining in the high-teens.
Across the Asia Pacific region, business sentiment and consumer confidence were up with improvements in many countries tied to changes in their political environments. And our business in Asia Pacifica, Middle East, Africa continues to do well with process transaction growth remaining about 30% and GDP growth in the high-teens for the second quarter.
So before we go to some of our business highlights, let me say a few words about a couple of legal and regulatory matters.
And first with regards to the proposed European Interchange Legislation. Not much has changed since last quarter. We are actively engaged with all parties, while the Council of Ministers continues its review. And we still believe that the proposed legislation is most likely to be adopted sometime in the first half of 2015.
Second, let’s talk about Russia. As you know, the Russians are implementing changes to their domestic payments market in the form of a new payments law, which will impact MasterCard. We are pursuing multiple options to comply with the new law while fulfilling our U.S. obligations. And according to that law, ownership of domestic Russian switching has to be majority controlled by a Russian entity and should use Russian technology in order to relieve a foreign payments network from the collateral requirement that is now been delayed by the way till October 31.
The law provides some flexibility. And you were all aware of our RFP process to find the local switching partner as one part that we are pursuing. In addition, the processing center we currently have in Russia, we believe gives us the basis to build our own on-soil switching capabilities and we are exploring options to leverage that as well.
Overall, we expect only minimal impact from the current Russia situation for our 2014 results. So that situation is still fluid as you all know, it’s difficult to put any future annualized impact into precise dollars, but if you look for a number, press for a number, our estimate today would be that our revenue could be impacted but something less than $50 million in its full calendar year of this effort. The exact amount along with any investment requirement for our on-soil switching capability will obviously depend on the final form of our operating concept in Russia.
So let’s move on some of our recent business activity. First, talking about Russia. I want to tell that as we continue to work through the challenges there, our business continues to move forward. For example, we just renewed our business agreement with Alpha Bank, Russia’s largest private bank, and that should help us expand our existing partnership in issuing affluent cards and accelerating the growth of contactless technology in the Russian market.
So let’s go beyond that to talk about how we deepen our relationships with merchants and leverage these into partnerships to grow our business. I am going to highlight some recent additional activity in that space, but not only with merchants but also with mobile operators and with governments.
We’ve been investing in our merchant relationships over the past few years. They are now 40% of our customer facing people, sales people in the United States are dedicated to that space. Last quarter, I mentioned the Wal-Mart, Sam’s Club and Target wins. And this quarter, we got a few more to talk about. At the beginning of spring of 2015, BJ’s Wholesale Club will be converting their entire credit business to chip-enabled MasterCard credit cards. And we are very pleased to be chosen as BJ’s partner to help them deliver most secure solution for their cardholders.
We’ve also had a couple of important renewals in our merchant co-bank business with Sears and Expedia, continuing our longstanding relationship with both of them.
Outside of the U.S., MasterCard was selected as the co-brand partner for the Landmark Shukran credit card in the U.A.E. Landmark Group is one of the largest retail organizations in the Middle East, 1,800 stores. They also are the region’s largest retail loyalty program in seven countries with almost 6 million members.
For us, our goodness of merchants is not just about co-brands. We are also working with merchants in a number of activities that leverage our other assets; Advisors, MasterCard Labs and so on. So using our Advisors’ data analytics, we are working with Expedia to help them improve the effectiveness of their marketing campaigns by identifying the best people to target, and with Shell and Williams–Sonoma to enhance their loyalty propositions.
Another example, we work through the major cruise line to identify opportunities for them to reduce their costs by moving their B2B payments from check writing to ACH to purchasing costs and virtual card numbers using our in-control capability.
And finally with MasterCard Labs, we’re bringing our partners together to help solve some of that business challenges. And one example, earlier this summer, MasterCard worked on this first ever in-flight wearable technology, Hackathon with American Airlines, where we gave our technology and our mentorship. We used technology tools like Simplify Commerce and MasterPass to develop wearable solutions for travel.
Moving onto mobile. Last quarter, we talked about mobile as being just one of the many ways that consumers are shifting from physical to digital payments, and now it represents one of the most significant changes in our space. In this quarter we continue to develop and expand our partnerships with both, handset manufacturers and network operators.
So a couple of examples. We worked with Samsung in Australia last year, if you remember, we continue to deepen that relationship by launching Russia’s first contactless mobile payment service with Russian Standard Bank using Samsung phones, Russian Standard’s mobile banking application and MasterCard’s Mobile NFC technology, our prepaid products and enhanced processing services. This partnership kind of brings our products and services together to deliver innovation in yet another market with Samsung.
In Canada, Rogers Wireless, which is that country’s largest wireless service provider, they have got 9 million subscribers or so, recently launched their suretap wallet, and that’s got a MasterCard prepaid card embedded inside. That new application allows Rogers’ subscribers to use their NFC-enabled smartphones to make contactless payments which were already accepted for example in Canada in the 18 of the 20 largest merchants.
Moving onto MasterPass. We’re continuing with our global expansion of MasterPass. MasterPass, as you know, is our got digital acceptance platform connecting consumers and merchants. In this quarter, MasterPass launched in Singapore, in Poland and South Africa. We are now up to 10 markets. We expect to do four more by the year-end. It’s more than a wallet by the way. It’s a platform which provides a safe and secure foundation to support multi-channel shopping and the ability to create innovative tools that you could use to enhance the consumer buying experience before, during and after the actual purchase.
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