Heartland Payment Systems' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Heartland Payment Systems (HPY)

Q4 2011 Earnings Call

February 09, 2012 8:30 am ET

Executives

Maria Rueda - Chief Financial Officer

Robert O. Carr - Executive Chairman and Chief Executive Officer

Robert H. B. Baldwin - President

Analysts

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Kartik Mehta - Northcoast Research

Christopher Shutler - William Blair & Company L.L.C., Research Division

Greg Smith - Sterne Agee & Leach Inc., Research Division

Robert J. Dodd - Morgan Keegan & Company, Inc., Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Roman Leal - Goldman Sachs Group Inc., Research Division

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Brett Huff - Stephens Inc., Research Division

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Heartland Payment Systems Fourth Quarter 2011 Earnings Conference Call. Today's conference call is being recorded. Now for opening remarks and introductions, I will turn the conference over to Maria Rueda, Chief Financial Officer. Ms. Rueda, please go ahead.

Maria Rueda

Thank you, and good morning, everyone. I'd like to welcome you to our fourth quarter 2011 earnings call. Joining me this morning are Bob Carr, Chairman and CEO; and Bob Baldwin, President. Today, Bob Carr will begin our discussion with an overview of the quarter, and then I will return to go through some of the financials in detail before opening the call to take your questions.

Before we begin, I'd like to remind you that some of our discussions may contain statements of a forward-looking nature, which represent management's beliefs and assumptions concerning future events. Forward-looking statements involve risks, uncertainties and assumptions that are based on information currently available to us.

Actual results may differ materially from those expressed in the forward-looking statements due to many factors. Information concerning these factors is contained in the report of our financial results we released earlier this morning and in the company’s SEC filings. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances that may arise after this call.

Now I'd like to turn the call over to Bob Carr.

Robert O. Carr

Thanks, Maria, and good morning, everyone. I'd like to thank you all for joining us today and for your interest in Heartland.

As you saw on our financial results for the fourth quarter released this morning, we reported adjusted net income of $14.2 million or $0.35 per share, increases of 73% and 67% respectively compared to the comparable figures in the same quarter of last year. These fourth quarter results are a satisfying conclusion to a year of significant financial and operational progress and improvement.

We are entering the new year from a position of strength and with the wind in our backs. We are using this momentum to capitalize on the great growth opportunities we see for 2012 and beyond in our very large and growing markets.

Certainly, some of the credit for our success goes to an improved economy. I strongly believe our success is primarily the result of the tireless efforts of the many dedicated Heartland team members, who are responsible for the widespread improvement throughout our business.

On the top line, we achieved double-digit net revenue growth in the fourth quarter through increases in new margin installed and same-store sales, as well as a reduction in volume attrition and card processing. Net revenue growth also reflects strong non-card business performance, including a significant contribution from our new K-12 School Solutions business. Operating margins were also up significantly relative to a year ago as our focus on productivity improvements help drive year-over-year declines in processing and servicing costs. And once again, our cash returns were exceptional.

On the new business front, the past 3 months were our best new margin installed quarter of the year. However, because last year's fourth quarter was also our best new margin installed quarter of 2010, the year-over-year comparisons are relatively flat. Relationship manager productivity hit another new record high. But looking at the bigger picture, new margin installed for 2011 was up for the first time in 3 years, and the growth in new business will drive future growth in processing revenues.

The implementation of lower debit interchange rate is a result of the Durbin Amendment, generated a lot of noise in the market, which did more to confuse than help the small and midsize merchants. In contrast to the immediate opportunity created by the last major interchange shake-up, the 2003 Walmart settlement, we think Durbin is creating a longer runway of growth potential for our Fair Deal sales philosophy. As of today, we have passed over $85 million of Durbin Dollars back to our merchants, and we believe that on average, Heartland merchants can expect to save approximately $1,000 annually per location.

As the noise and confusion gives way to the reality of monthly statements, we expect new account acquisition will come down to the savings experienced by the individual merchant, and that's why we really like our chances going forward.

We're getting other benefits from Durbin. It has energized our sales organization, not only existing relationship managers but also new hires. There has been no better recruitment tool for our sales organization than the Durbin Amendment.

Sales professionals are coming to us saying, they want to work for an organization like Heartland that is treating its merchants this way. In the quarter, we added 47 new relationship managers and we remained encouraged by the progress of our new hires as -- have made in building their productivity. We need to keep working on our retention and recruitment strategy, as it's clear that, to increase the level of installs, we need more sales people on the team. Nevertheless, we feel very good about our direction and progress.

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