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.