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MasterCard, Inc.'s (MA) CEO Ajaypal Singh Banga on Q1 2014 Earnings - Call Transcript

MasterCard, Inc. (MA) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


PARTICIPANTS

Corporate Participants

Barbara L. Gasper - Head-Investor Relations, MasterCard, Inc.

Ajaypal Singh Banga - President and Chief Executive Officer, MasterCard, Inc.

Martina Hund-Mejean - Chief Financial Officer, MasterCard, Inc.

Other Participants

David J. Koning - Analyst, Robert W. Baird & Co., Inc. (Broker)

Daniel R. Perlin - Analyst, RBC Capital Markets LLC

Tien-tsin Huang - Analyst, JPMorgan Securities LLC

Christopher R. Donat - Analyst, Sandler O'Neill & Partners LP

Jason A. Kupferberg - Analyst, Jefferies LLC

Smitti Srethapramote - Analyst, Morgan Stanley & Co. LLC

Craig J. Maurer - Analyst, CLSA Americas LLC

David S. Hochstim - Analyst, The Buckingham Research Group, Inc.

Kevin D. McVeigh - Analyst, Macquarie Capital (USA), Inc.

Sanjay Sakhrani - Analyst, Keefe, Bruyette & Woods, Inc.

James Friedman - Analyst, Susquehanna Financial Group LLLP

Bryan C. Keane - Analyst, Deutsche Bank Securities, Inc.

Bob P. Napoli - Analyst, William Blair & Co. LLC

Darrin D. Peller - Analyst, Barclays Capital, Inc.

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the MasterCard First Quarter 2014 Earnings Conference Call. My name is Adrianna and I'll 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 would now like to turn the call over to Barbara Gasper. Ms. Gasper, you may begin.

Barbara L. Gasper, Head-Investor Relations

Thank you, Adrianna. Good morning, everyone, and thank you for joining us for a discussion about our first quarter 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 for the queue.

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 May 8.

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 here 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?

Ajaypal Singh Banga, President and Chief Executive Officer

Thanks, Barbara, and good morning, everybody. For the first quarter we are very pleased to deliver strong results with net revenue growth of 14%. That's driven by a healthy growth in gross dollar volume by process transactions and cross-border volume. And this combined with our operating expense growth of 12% is what's helped us drive EPS growth of 18%. So as usual, let's start by the global economic trend starting with the U.S.

Our first quarter SpendingPulse data showed U.S. retail sales ex-auto growing at 2.8%, down from the 3.9% growth in the fourth quarter of last year. And I guess that reflects the harsh winter weather conditions that affected parts of the U.S. as well as a later Easter. But on a positive note, consumers continue to spend more in some interesting sectors like airlines, lodging, restaurants, furniture and furnishings, and that reflected the increased consumer confidence we saw in the quarter. But we're going to continue to watch these indicators in the coming months. The good news is that despite the headwinds on consumer spending, our U.S. business in the first quarter saw process transactions and gross dollar volume growth higher than the fourth quarter 2013.

In Europe, the environment continues along a path of slow growth with positive PCE projection for the year, although those are slightly down from last quarter's forecast. Across the region, consumer sentiment and business sentiment have continued to improve, and are MasterCard's total European volume growth for the first quarter was in the mid-teens, and process transaction growth in the low 20%s, a bit higher than the fourth quarter, driven by growth in a number of countries including Russia, Sweden, and Turkey, as well as continued healthy growth in the UK.

In Latin America, the overall consumer confidence was mixed across the region. Brazil's consumer confidence starting to stabilize in March, and our SpendingPulse data showed a 5.9% growth in consumer spending there, up slightly from last year's fourth quarter. In Mexico, consumer confidence also showed some signs of stabilizing, and I think it's expected to improve. Our business in the region continues to do well with GDV and process transaction growth for the first quarter in the mid to high teens.

In Asia Pacific, consumer confidence like in Latin America remained mixed with some evidence of a slight slowdown in consumer spending during the first quarter. But in South Korea, China, and Southeast Asia, they actually saw improvement in confidence levels. Interestingly, business sentiment was up across the region. And our business in the Asia Pacific, Middle East/Africa continues to do well with process transaction growth about 30% and GDV growth in the high teens for this first quarter.

So overall, the U.S. and Western Europe seem to be continuing to move along a slow path to economic recovery. While there has been increasing optimism about Europe, I think the recent geopolitical tension could have an impact on consumer and business sentiment. And growth in Asia Pacific and Latin America, as you know, is affected by, among other things, the continued global economic instability but also by domestic concerns like labor market conditions and consumer sentiment and spending and elections and - all of which we'll continue to watch.

So before we move on to our recent business highlights, a couple of quick words about legal and regulatory matters. First, at the end of March, the U.S. District Court of Appeals reversed Judge Leon's July decision on the Federal Reserve's implementation of the Durbin Amendment, so absent further appeal, the regulation remains as it was originally implemented by the Fed. The appeals court decision is good for the industry for a couple of reasons, including because it clears away one of the uncertainties in the market related to EMV adoption.

Second, with regards to proposed European interchange legislation, you've heard us say before that this legislation offers us both opportunities and challenges. A vote by the full Parliament occurred in April, which added, among other things, commercial card interchange to the scope of the legislation. Separately, a panel review of the legislation was started in late Feb by the council of ministers, and the European Commission will also need to weigh in. We're actively engaged with all these parties. There is still opportunity for the proposed language to undergo changes, and we continue to expect that adoption is probably most likely in the first half of 2015.

So finally, something about Russia and the geopolitical events going on there. Over the past few years, we have made a lot of good progress in Russia, although it represents only a little over 2% of our total net revenue. The sanctions have had a significant impact in that market, not as much from an immediate financial standpoint for MasterCard, but rather on the ground, where the Russian government is working to implement legislation to change their domestic payments market structure. And we're still assessing all the elements of this new law. There are provisions there that I believe would create serious complications for the way that we can operate in that market.

One of those provisions deals with a requirement for on-soil switching capabilities. Now, with our distributed network structure as a foundation, we've actually moved further towards an environment that can be flexible in terms of on-soil requirements. In fact, earlier this year, we launched a 24-by-7 operations center in Russia. What we have in place today does not, I believe, meet all of the new Russian requirements, although we're still studying those, but we believe it may actually provide some of the ingredients that will be necessary. We're also very concerned about the new collateral requirements in the law, which we continue to look at.

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