Earnings Call: Q4 2012

Jan 31, 2013

Good morning, ladies and gentlemen, and welcome to the 4th Quarter 2012 Earnings Call. My name is John, and I'll be the 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 Casper. 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 Q4 and full year 2012 financial results. With me on the call this morning are Ajay Banga, our President and Chief Executive Officer and Martina Hunmejian, our Chief Financial Officer. Following comments from 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 ks that we filed with the SEC earlier this morning. A replay This call will be posted on our website for 1 week through February 7. And 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'd like to turn the call over to our CEO, Ajay Banga. Ajay? Thank you, Barbara. Good morning, everybody. As usual, before Martina gets into the details of our financial results, I thought I'd give you some of my thoughts from another level Looking at our business, in the 4th quarter, we reported net revenue growth of 10% and that's 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 process 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 percent FX adjusted. So now let me talk a little bit about the global environment. And I know that's on everybody's minds. And Let's start with the United States, where we continue to see a mixed economic picture. The economy was a bit choppy in the 4th 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 spending pulse 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 3rd quarter. So You can see that trend between the 3rd and the 4th quarter. And within the 4th quarter, the monthly growth rate was decelerating. However, there were also some positive trends. So in December, consumer spending increased in 8 of the 11 retail sectors that we track in Spending pulse with the strongest growth continuing to come from Furniture, Hardware associated with what we've been saying for a while Was the rebound in housing. Now 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. But this is the 4th quarter we're And we continue to see improvements 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 4th quarter U. S. GDV growth was 7%, which kind of is the same as what we had in the 3rd quarter. Let's go to Europe. And as you know, the region's economic environment is complicated. It's probably going to remain that way over the next few quarters. Looking first at the U. K, where SpendingPulse data actually showed the year's strongest retail sales growth Occurred in the 4th quarter, 3.8 percent and consumer confidence levels have improved over all these 4 quarters, the last 4. However, the U. K. Economy as a whole Contracted in the 4th quarter and for all we know it may be headed for another small decline in the Q1. If that were to happen, it It will make it the 3rd time that the U. K. Has had a technical recession since 2,008. So we expect U. K. Consumers to remain cautious. It's still not clear to me Whether the positive spending and confidence trends will continue into 2013, but the Q4 was interesting and a good surprise. Looking across the Eurozone, consumer confidence declined slightly. Business sentiment remained weak in the 4th 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 Seeing 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 economies 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 U. K, we saw an acceleration in volume growth for the U. K. In the 4th quarter as well. In Asia, business and consumer sentiment is mixed across the major markets because after all economic uncertainty in the 2 largest Consuming markets of the U. S. 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, 4th quarter GDV, process 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 4th quarter With Mexico as it is always getting impacted by U. S. Economic conditions, 70 odd percent of Mexico's GDP Comes from in some way a connection with the United States. In spite of that, consumer sentiment across most of the regions increased. We Our Owned 4th 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 still got a cautious outlook going into 2013. There is going to be uncertainty in Europe. The U. S. Could well be on a 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 We're 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 U. S. 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 Hotel 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 Hotel Group Consumer Credit Portfolio as well as actually even more interestingly a bronze range of marketing, loyalty and innovation initiatives. That's the first one. Second one, Bass Pro Shops and you probably know of them. They're 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, 1st we just renewed our agreement with Shell for their consumer co brand card program. That's good. But in addition, we have just had another interesting in this space and we have become the exclusive payments 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, a restaurant, an 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's kind of 2 things in the fuel space. And in November, KeyBanc agreed to extend the exclusivity we have on their debit and prepaid programs to now include new issuance for both Your credit and commercial credit portfolios. So as you know last year's announcement with KeyBanc 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 And last quarter SunTrust launched a new portfolio of platinum and world consumer credit Mastercards, which are being made available through online, but also through So that's 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 twenty thirteen. It kind of mirrors the RedCard loyalty program in the U. S, 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 With whom we have got successful partnerships Walmart, Hudson Bay Company, Loblaws, the whole lot. Concluding our momentum in the U. S. Commercial space, We've expanded our existing agreement with U. S. 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 like corporate and purchasing card programs. And in 2012, U. S. Bank actually became one of our top ten Commercial card issuers with all the partnership we're doing with them. We're continuing our work with governments and other partners to So let me highlight a few examples from Africa. I've actually just come back from a trip to Kenya, Nigeria and South Africa. And as I said, 2 weeks ago, we announced an agreement with Equity Bank in Kenya, one of East Africa's largest financial institutions. We're going to be putting 5,000,000 EMV debit and Prepaid cards in the market over the next 18 months. That's 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, 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's their history. Last quarter, we launched a collaboration with Conviva Technologies and Tutuqa To extend financial inclusion to 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're also going to be able to use the service to pay bills, do fund transfers, First, all the things that they would like to do given the circumstances of that market. Initial focus, African countries like Kenya and Nigeria, where Conviva is selling or has sold services with Airtel. We've also been working with the Central Bank of Nigeria and The federal government there may have met on this trip to modernize the payments industry and introduce acceptance training workshops highlighting the benefits of accepting Electronic Payments for Merchants. And our advisers 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 Other 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're driving ahead of our efforts to develop partnerships with network operators and other companies. And it's interesting just that I was putting this number together. We have 25 initiatives around the world in just the past 2 years. I'm not counting what you were doing earlier. In just the past 2 years, 20112012, we have 25 new initiatives. So let me give you two examples of what's going on in Brazil in this space. 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 2nd 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. We're 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 2nd largest mobile network operator in Brazil and Caixa Economica Federal, which is a bank issuing partner of To launch our mobile money program in Brazil for Tim's 69,000,000 subscribers. So these two partnerships combined in Brazil will help us to serve almost 150,000,000 mobile phone subscribers, which is about 60% of the Brazilian mobile market. So let's talk prepaid. Couple of wins that we've had from the U. S. And Europe, which I can talk about. Mastercard will become Agta's preferred payment brand for their health care flexible spending accounts, health savings accounts and prepaid store value cards So these plans allow consumers, as you know, to access money in an account usually attached to a health plan to pay for eligible health expenses with pre tax 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 Mastercard branded, PayPass enabled, prepaid and credit cards. So cardholders will be able to collect loyalty points when shopping at DNI outlets Or at any location around the world where Mastercard is accepted. ENI is planning to install PayPal's terminals in their gas stations and coffee Which is great news for us, because that will make them the largest PayFast merchant in Europe when they complete this. By the way, we're now up to about 700,000 PayPass outlets around the world, up from the 400 odd 1,000 that we had at this time last year. So this is all part of what we are 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 6 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 U. K, in the U. S. And Canada. In Bahrain, Al Barakah Bank and Nonu Exchange launched the 1st platinum prepaid card in that country. The card offers access to events and destinations as well as merchant discounted 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 UAE Exchange, a leading regional remittance in exchange hours. So GoCash It's the Middle East's first 6 currency prepaid travel card. So consumer can load up 6 currencies, lock down the value of their foreign currency in advance of their travel. So that's kind of what's going on around the world. And let me turn the call over to Margina for the detailed update on our financial results and all our metrics. Latina? Thanks, Ajay, and good morning, everyone. Let me begin on page 3 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 Q4 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. Now cash flow from operations was $866,000,000 and we ended the quarter with cash and cash equivalent and other liquid investments of about $5,000,000,000 During the Q4, we purchased about 1,300,000 shares at an approximate cost of $613,000,000 Through January 25, We have purchased an additional 322,000 shares at a cost of about $165,000,000 and we now have $440,000,000 remaining under the current authorization. We will continue to look to repurchase shares on So let's first talk about the operational metrics for the Q4 and here we'll start on page 4. Our worldwide gross dollar volume or GDV was up 14% on a local currency basis. In the U. S, GDV grew 7%. Debit growth in the U. S. Remains solid at 11% and credit volumes In the U. S. Grew about 2% with commercial credit growth up from last quarter in the high teens. U. S. 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 U. S, volume growth was 18% on a local currency basis. And this includes to be driven 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 Turn to page 5 and here you see our process transactions were up just over 20% and that's our 6th Consecutive quarter of 20 plus percent growth. As expected, we continue 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 U. S. Debit wins. So let me drill further down into the numbers and a little less than half of the 20% growth comes from new pinned debit transactions in the U. S, Leaving about 12% as the underlying growth rate very similar to the last couple of quarters. Globally, the number of cards grew 8% to 1,900,000,000 Mastercard and Maestro branded cards. Let's now turn with this background to page 6, where you can see both the 4th 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 5 percentage points of which 2 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 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 process transactions. Narrowing considerably from recent quarters, the gap between these two growth rates can be attributed to U. S. Pinned debit transactions that come with a lower than average revenue yield. Only a small portion of the GAAP is explained by foreign exchange. And finally, the distribution of rebates and incentives followed relatively the same pattern as last With 4th quarter representing slightly less than 30% of full year 2012 Total rebates and incentive amount. Let me move to page 7, 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 and 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 7,500 full time employees. The net impact of foreign exchange activity was also a factor in the G and 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 8 and let's discuss 2013 starting with an of what we have seen for the Q1 through January 28. Globally, Our cross border volumes grew about 18% and that's just slightly higher than what we saw in the 4th quarter. This was primarily higher growth in our APMEA and LAC regions. In the U. S, our processed volume proxy for GDV grew 6 That's just a bit lower than our 4th quarter growth, primarily due to the lapping of some debit We did, however, see a slight increase in our consumer credit growth. Processed volume growth outside the U. S. Grew 15%, which is a bit lower than what we saw in the Q4. 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 4th quarter. Globally, process transaction growth was 17%, down from the 20% we saw in the 4th Quarter mainly driven by the full lapping of our Netherlands processing wins as well as some lapping of U. S. Debit wins. As a reminder, with the April 1st anniversary of the U. S. Regulatory change relating to debit card non Exclusivity, we expect a deceleration in our process transaction growth rate for the rest of 2013. So looking forward, let me just start first with our long term performance 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 on 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 3 year period might be slightly 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 percent and that will result In a pro form a 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 twenty thirteen to be below The 10.7% currency adjusted rate that we saw in the second half of twenty twelve. 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 and initiatives such as mobile, e commerce and information services, our total operating expenses will continue to grow, likely We're 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 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 Bob Roy to begin the Q and A session. Barbara? Thank you, Martina. We're 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, are you there? Thank you. And I'll begin the question and answer And we have a question from Craig Moore from CLSA. Please go ahead. Yes, good morning. Regarding your comments on European cross Order 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. Yes, Craig. I'd love to say, this has happened over the last 2 years a couple of times when if you go back to our earnings calls, you'll find there were quarters when Europeans tended to travel within Europe. I think a lot depends on that feeling of confidence. My sense is, you look at January, most of the cross border growth that we've talked about Martina was very careful to say It's 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. Probably a fair question, which I don't have a good answer for. Thank you. Our next question is from Jason Kupfer from Jefferies. Please go ahead. Hey, thanks guys. Just wanted to ask a question here in the U. S. 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 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'll be any material difference in your network economics in the U. S. Once EMV and chip and pin, if it goes chip and pin actually becomes reality? So the second one first Just I'll repeat that from past time. We do not expect a material impact to our economics just because That hasn't happened elsewhere that EMV exists. And that's kind of what we've been saying a few times. And my thinking on that hasn't changed. The first one, When we started this whole EMV journey, they have said many times over that it's 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's how we did it differently from some of the other forces out there. And I think we therefore feel that we're in Together, we're working with them. We've recently announced that we're 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're trying our very best to be flexible and thoughtful and take all the ecosystem players along. But That's how we are planning for it. I have no way of saying will October become December or will some other trend move. But I got to tell you our discussions are pretty productive. And The announcement that OpenAPI 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. Next question. Our next question is from from Rod Burgoyce from Bernstein. Please go ahead. Yes. So just a couple of questions about what's Happening in Europe and from a regulatory standpoint. And 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 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. So we'd love the comments on the European dynamics. Rod, it's Martina. I'm going to take your first question. First of all, as we had said a number of times, there is absolutely no impact From what is happening from an interchange environment on what's 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 Peans are staying closer to home. And just by the effect in terms of how our cross border fees are set up in Europe Versus when Europeans are actually traveling overseas, that's where you see a change on our yields. But it has absolutely nothing to do with the regulatory environment. At the end of the day, they're also spending in the same currency. So we have that issue as well. We don't make the money that you would make either the issuing banks or us On the FX, there's a lot of reasons Rod. It's not the reason that you may otherwise think. It's 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 the Europeans being prone to passing regulations. Boy, that's a politically great statement. But you know better than I do that they love passing regulations. It's just a reality. So 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've said that in the Q2 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 on legislating interchange. And to make sure that if there's still serious, but continuing vigorous competition in the EU's payments market, which by the way, I think it's a very competitive market. Any interchange regulations got to be carefully weighed against the now known consequences of reduced rates. We've In Australia, we haven't seen the benefit of lower pricing in the U. S. Going to anybody, 13 are at a gas station. So in addition, a level playing field between open 4 party schemes and closed third party schemes has got to be insured if they want to be fair in the legislation. So there's 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're 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, ask the banks and the merchants in Europe. I still think there's an enormous amount of opportunity in Europe just given the quantum of cash in those economies. Germany It's still 80% cash. Just one number, Germany itself. You forget before you get to the Italys and Greeces of the world. So, yes, they still happen. It's one of the things we got to deal with, but we're dealing with it. And Ajay, could you have some more domestic processing wins in Europe in the hopper just To complete the European picture? Yes. 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 we're in it. It's just that you get portions. In fact today, we see domestic processing transactions in most of the European countries, which we did Let's see just 3, 4 years ago. So we're at different stages of opportunity in different countries. It takes a little time And we're kind of growing along as we go. And it's not a bad way. We're at 50 something percentage points up over the previous period On our European domestic processing numbers, that's a good thing. But it's of a smaller base than what we have in the U. S. And in Brazil. Operator, can we go to the next caller, please? Next question is from Sanjay Sakhrani from KBW. Thank you. Good morning. I've got a question on the U. S. Credit card market for Ajay. You've talked about some of the impacts related to the mix of your customers, which have May have led to underperformance over the past couple of 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, Sanjay. 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's why I'm uncertain about the U. S. 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 2 or 3 years compared to some of the economies overseas. But 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 1 quarter did surprise me. So those are the kind of things that I don't know where the U. S. Would go. Until all those forces align, you can't I see the North Star being the revival of consumer credit, if you know what I mean. But there's 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're in, right? 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're doing, they're doing some very intelligent things as institutions to help revive their businesses. So when they do revive, yes, absolutely, I will also get an opportunity to ride their revival. But I don't know when that will be, because I'm not partying privy To what they're up to inside, I just see what I see. So you see as much as I do more or less on that one. That's the part I don't know how to answer. In the meantime, what I'm trying to do is to diversify my customer base in the U. S. And that's what takes time. But I have Over the last year or 2, 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 The Shell and the Fuel Rewards Network. And there are others like those in the hopper. Thank you. Our next question It's from David Togut from Evercore Partners. Thank you and good morning. U. S. Commercial credit continues to drive most of Your GDV growth. David, could you speak up just a little bit? We're having a hard time hearing you. Okay. Can you hear me now? Go ahead. You were saying something about U. S. Commercial credit. Yes. So U. S. Commercial credit continues to drive most of your U. S. Credit GDV growth. Visa has made a lot of investments in their U. S. Commercial credit platform, even though they were really years behind Mastercard. Do you see the competitive battle with Visa changing a lot in U. S. Commercial credit over the next couple of 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 to do. It's a well served market, both by Amex and Visa, quite frankly. We all do a decent job. In many ways, I think our assets We've taken a lot of time to get the We've put money into improving a number of our assets over and beyond what we had, let's say a couple of years Right. So we've got a new version of smart data 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 U. S. And you do not only go to certain countries where you can go to the 5 star hotels or the bigger restaurants. I continue to make this point that it 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 deal. We believe that the power of our acceptance is superior to that of others. And so between different competitors of different advantages and disadvantages vis a vis us, my sense is between smart data, 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 2. Who the heck knows But I'm pretty confident of our advantages and our product portfolio. Thank you very much. Next question is from James Friedman from SIG. Hi. Thank you for taking my Question, since it's 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. Hi, James. Not seeing anything new. It just happened on the 27th. And so it's been 3 days and I don't know that anybody's done much in that space. But with remember, first of all, a number of states in the United States do not allow this even if the settlement provides So that's kind of one thing that you've got to factor in. And there are 10 states that don't allow it, but they also represent a larger percentage of the transactions just because 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 U. K. Or Australia or other locations where So charging has been going on for some years. I've seen it start in some ways, Fizzle Out and 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's that idea. But In the settlement, it is allowed. On 27th, they could go ahead. I'm sure there are a number 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 U. S. Second, the picture isn't as clear as some spreadsheet would give it out to be. It is a little murky, but that's how I think about it. I think over 6, 7, 8, 9 months depending where this whole litigation Goes with the quote and the opt outs and the like, that's when you'll be able to see where really this is going. I doubt you'll see a great deal in the early part of these days. Thank you, Anja. Our next question is from Bryan Keane from Deutsche Bank. Hi, guys. Just want to ask about the move to EMV Chip and PIN. I assume that's going to impact your debit Since the likely move to Penn will drive lower U. S. Debit revenue. So I guess just thinking about the strategy, how do you plan And to offset that debit yield revenue loss. And then second question for Martina, the pickup you expected 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. Yes, Brian, let me take both of them, because we just had the question in terms of whether the move to chip and pen is impacting our economics and Ajay had said no. When we look really at other markets where we had introduced EME over a number of years, it really does not impact our economics. Every market is obviously different, We really don't expect anything differently in the United States. In terms of the net revenues moving potentially higher in the higher end The range beyond 2013, yes, it's 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's going on in the economy. And as you know, we are really relating that to a growth consumption expenditure. And we do believe that in the early part of the range of the 2013 to 2015 period that Really the puts in consumption expenditure is a little lower than what we've seen in the last few years. And hopefully as As the word normalizes that will move up. So it's only that one particular impact. It's not the other drivers that drive our revenues which It's basically the secular trend in terms of conversion from cash and check to electronic forms and payments nor what we are thinking in In terms of participating more in that 15% share that is already converted to electronic forms of payments. So Brian, 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 PC, 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 twenty thirteen will actually be tougher than the second half, let alone out into 2014, just given what's going on in the U. S. And Europe. But once we get past that, we are doing a bunch of things strategically to grow more share Fair in the 15%. We're doing things to participate in the 85%. All that's factored into the numbers we gave you. The only variable So we see changing, which is driving the guidance we're 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're doing things to grow our business. We're doing things in mobile. We're doing things in prepaid, in commercial, in credit, in debit, in biometrics, In financial inclusion, that's not changed. It's the response from the PCE that really Martina is referring to. 2nd little clarification you might think about is Let me give you one of the many reasons why EMZ technology implementation doesn't equal diminution of economics. Giving you 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've got a $300 bill. You're 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 in a single message. That's a little different. You stay at a hotel. You use a rental car. So they're all different transactions To just the ones that go through very easily on single message. So EMV, what it really does, it's a card authentication methodology. It tells you When that card goes in, there's a dynamic encryption on the chip. It says that's a real card. It's not one that's been counterfeited or compromised. And so that's what it's about. And that's why I would encourage you to think about this a little differently from, oh my god, that just means everything's going to hell in a handbasket To chip and pin. We had 20 odd years of experience of doing this in Europe and Asia. And so we've got some history behind us when we're telling you this. I hope that helps, Brad. No, that helps. I mean, the confusion always is that the debit market has 2 different yields for Signature And for Penn, so that's pretty clear. That's got a lot to do with the nature of debit as a business where you're really in fact, if you think about outside of the U. S, It doesn't have such a widespread between Signature and Fin. The U. S. Had a developmental patent where Signature debit went all the way to Signature credit and that's what led to The Durbin legislation. So this is a self fulfilling issue. I actually think that debit per se being the money of the consumer has a different profile and 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. Our next question is from Glenn Fodor, a Private Investor. Please go ahead. Hi, good morning. It's Glenn Fodor from Autonomous Research, thanks for taking my question. Ajay, reports that debit issuance is beginning to gain momentum in some parts of your MPS segment. What's the story here for For gaining more volumes, is it just winning new issuing business? Or do these countries have local government bank backed debit schemes that you'll have to compete with Similar to Europe and that could impact your growth rate? Blair, I didn't hear the first part when you started out. I heard the second part. You said Something's growing in Europe and you went in and out on me. I'm sorry. I'll switch to the handset. There's just been some Reports out there about debit issuance is gaining momentum in some parts of Asia Pacific, Mideast and Africa segment. So what's the story Regaining volumes, is it just winning new issuers? Or are there debit schemes like there are in Europe owned by the banks that you can win and things like that? Got it. Got it. So I guess, a great question, Glenn, I it's doing 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 Not true for all, but in most of them. So what we're 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 process transactions around the world through all these reasons Of the kind of schemes you're talking about. But that number has been growing. Thanks to SEPA, thanks to the work we've done in Brazil, thanks to work we're doing in a number of countries around the world. But This is a continuously moving issue. And most of the emerging market countries as they see the value of payments in electron their environment and country, they're 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 That payments network, so that's been embedded in where they are. And it's not just us doing it, it's others doing it too. So all of that actually is great, because What it's doing is it's driving the move from cash to electronic. And I tell you the opportunity in place like Africa, I mean, this trip this week in Africa Just reinforced everything. And in December, I was out in Myanmar and of course in the developed economies of Asia. But if you go to Myanmar and you see the opportunity, it's Not today. Maybe my successor will get a great deal of benefit out of me and Mark. But I tell you for the next 20 years, You can see the opportunity if we do this systematically with technology, with care for local governments and being sensible about the role we play. And that's what we're trying to Thanks, Ajay. Appreciate it. Somebody else? Question, Gabriel? Next question. And we have a question from Ken Bruce from Bank of America. Thanks. Good morning. My question really develops on a couple of the There are questions and answers that you provided specifically around the secular growth potential. I'm wondering if you're seeing any changes To that aspect of the growth potential, I mean, if you just look at the last couple of quarters, obviously, the economic has been quite low and has been creating headwinds yet you continue to grow through that. And I'm wondering, is it that you're Seeing the secular potential accelerate here to the upside or if it's more the market share wins that is Is essentially driving that growth? And how do you see that playing out? And I have a follow-up after that. Yes. I don't think the secular growth potential has yet. All the work we're doing, think of Maths you're dealing again. So when you launched 5,000,000 cards in Kenya that's interesting, but there's like hundreds of millions of people in Africa. When you do 10,000,000 South African Social Security benefit cards. That's interesting, but there are 60,000,000 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's also interesting that the emerging world and the developed world are kind of moving around in terms of their PCE growth. So what's happening is with the emerging world growing faster And with their PC growing faster, but 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's a change happening in the emerging world that's pretty quick. And but the total number doesn't change. So I don't know yet. I think that's what we've got factored in, in the guidance we've given you is what we See today in that secular growth, it isn't dramatically different from the last 2 or 3 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's where we are. Operator, we have time for one last question. Our next question is from Julio Quinteros from Goldman Sachs. Julio? Julio. That's my Indian. That's my Indian name. You're I'm good. I'm good. So 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 second half of twenty thirteen? Well, as you know, The rebates and incentives are all baked in what we said already about revenues, right? And I really don't expect any different cadence than what you already had seen in the last year, which was by the way not too different from 2011. From an A and M spend point of view, so I I just want to draw you back. We said total operating expenses for 2013 is expected to be just a A bit below the 8% currency adjusted growth rate that we saw in 2012. And really what you should be taking this All line items, so G and A, A and M, as well as D and A will be impacted from that point of view. So all of those line items you should be expecting Things to grow in order to get to this just bit below 8% on a total basis. Okay, that's great. Ajay, of the 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 What are you guys looking at? Good question. It's mixed. There's the NFC tap and pay kind of stuff is in a number of the markets. But actually What's also doing really well is the joint venture we had with Smart, which uses basic Wallet that allows SMS based money movement. That's what Telefonica has. That's what we're doing with a number of people. Tim, we're doing it with Turkey, With the TOXEL, which actually is probably out there the longest and the most effective. So it's a mixed bag there, Julio. There's both types going on. And as I 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 go NSC And tap and go whether it go with the SMS, what role the wallets will play. That's why we're so keen to put our wallet as Open wallet rather than one where 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 in any other part of the card. And that's kind of what our whole perspective is in this mobile space. So it's 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, Aja, you've got Some closing comments? Yes. Just 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 in. 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 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've just talked about. And as you all know, consumer spending and confidence was slower in the second half of twenty twelve In many parts of the world, that environment continues as we enter 2013. We are all very conscious of that. We are very watchful. We're 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 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 U. S. Economy has the potential outperform over the 3 year period and that will have a salutary effect on global economic conditions. Meanwhile, our task 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 just keep investing in driving the conversion of cash through technology, but also through public private partnerships around the world. That's what we're 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