Good day, ladies and gentlemen, and welcome to the Q2 2012 Mastercard earnings conference call. My name is Laura, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require an operator's assistance, please press star followed by zero, and we'll be happy to assist you. I would now like to turn the conference over to your host for today, Ms. Barbara Gasper, Head of Investor Relations. Please proceed.
Thank you, Laura. Good morning, everyone, and thank you for joining us today, either by phone or webcast, for a discussion about our second quarter 2012 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. 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. Both the earnings release and the slide deck include reconciliations of any non-GAAP measures to their GAAP equivalents. They have also been attached to an 8-K that we filed with the SEC earlier this morning.
A dial-in replay of this call will be available for one week through August 8th. 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. Now with that, I will turn the call over to Ajay.
Thanks, Barbara. Good morning, everybody. In the second quarter, we saw net revenue grow 9% as reported or 13% on a constant currency basis. This increase was driven by healthy volume and transaction growth, which helped to fuel net income growth of 17% and EPS growth of 19%. A very good quarter despite some of the global economic headlines that we're all seeing. While looking at those underlying economic trends, I'm just going to start with the United States. Our Mastercard SpendingPulse data shows that second quarter retail sales, ex auto, for the economy as a whole grew by 5.5%. This growth is not as robust as the 7.4% we saw in the first quarter. Mastercard's United States GDV follows that trend with 9% growth in the second quarter versus 14% in the first quarter.
This pace of retail sales growth right now is expected to slow further through the second half of this year. Most of this anticipated deceleration is explained by tougher comps in the economy versus a year ago. However, consumer confidence could also play a role. One example of that is that the impact of lower gas prices is not yet making its way back into other sectors of U.S. consumer spending, and in fact, is adding to the savings rate of households in the United States as the FT says this morning. The housing market seems to be showing some signs of recovery, but unemployment rates have remained around 8%, as we all know, for the past two quarters.
Given all this in the current economic situation, our perspective is we would need to see more stable growth signals before expecting U.S. consumer confidence levels to show a sustained increase. In Europe, despite the current economic headlines, our volume and transaction growth has remained fairly steady. Growth in Northern and Eastern Europe is compensating for slowdowns in markets such as Spain and Greece. Consumer confidence levels are recovering from their year-end 2011 lows, while business sentiment, on the other hand, is still declining as a result of the current economic crisis. These are conflicting signals, and they indicate that continued market volatility is likely to continue in Europe, at least for the near future. Elsewhere in the world, Latin America and Asia continue to show solid performance for Mastercard, despite a few signs of economic softening.
Brazil, our largest market in Latin America, began showing some signs of economic slowdown, although consumer confidence has remained high. Both our domestic and cross-border volume growth in Brazil remain strong, with growth rates well above 20%. Looking across the major markets in Asia, we're seeing the same indications you're all seeing of economic slowdown in China and India. While that did not seem to have an impact on this quarter, we're going to be watching this very carefully during the second half of this year. Overall, we maintain our cautious outlook for the rest of 2012. We will continue to watch global macroeconomic indicators, particularly as they pertain to Europe. We would need to see improvement in these before we can expect sustained positive growth in spending trends.
While this economic climate is volatile, our business continues to show strong double-digit growth, and we think that we are successfully navigating through the economic challenges by focusing on what we can influence and control and executing on our business strategy against those things that, as I said, we can influence and control. Before I get into our business highlights, let me give you a brief update on the litigation front. As you know, we recently announced settlement terms for the U.S. merchant class litigation, as well as an agreement in principle with a group of individual merchants. As a result of where the negotiations finally landed, we took an additional $20 million pre-tax charge in the second quarter to recognize our total financial obligations of $790 million under the settlements. You will recall, we took the other $770 in the fourth quarter of last year.
This settlement represents a solution reached after years of litigation and months of negotiation. That negotiation process directly involved 36 merchants and five trade associations, with the assistance of the court, resulted in a settlement framework that was approved by all parties. We recognize that some merchants may have different opinions, the nature of any settlement is going to involve compromise by all parties. Having said that, we fully anticipate that the settlement will be approved by the court. Moving forward, we understand that it will take some time for passions around these issues to settle down. Our ultimate goal is to ensure that the payments ecosystem, merchants, consumers, and issuers, is healthy and transparent, that electronic payments can continue to provide value for all these participants in the ecosystem. Let me turn to our business highlights now.
I'm going to begin with our initiatives to support governments around the world. Our approach in working with them highlights the positive aspects of electronic payments. My attempt here, remember, is to reduce the level of cash that is used in the economy. In particular, efficiency and financial inclusion are the positive aspects that we're talking about. Let me give you three examples, South Africa, the U.S., and Canada. In South Africa, Mastercard was selected to supply debit cards for the South African Social Security Agency in partnership with Net1, our technology partner, and Grindrod, one of our local bank partners. The program is designed to help the government reduce fraud in these social benefits, also provides an introduction to bank accounts for a large portion of South Africa's currently unbanked population.
The cards contain an EMV chip with a biometric application that requires the card owner to be authenticated before benefits can be loaded each month, that's the aspect of fighting fraud. A total of 10 million people are expected to receive these benefit cards by mid-2013. 25% of those cards are already in the market as we speak. Also in South Africa, PayPass has been expanded to the transit system in the city of Durban through the use of a Standard Bank Mastercard Muvo card, including PayPass functionality for retail and a transit wallet for the local buses. This debit card was introduced in the province of KwaZulu-Natal just last week. The card is designed to make public transportation more accessible, more efficient, supports the government's financial inclusion drive for their unbanked population.
This Muvo card is expected to be expanded to the local railway network, the taxi industry, and other transportation operators in the future as a way to integrate that transportation system across the entire province. As I've mentioned the past few quarters, here in the U.S., we've won a number of public sector programs with the states of California, Illinois, New York, Oklahoma, South Carolina, I'm now pleased to add Alabama to that list. Mastercard is now providing solutions for 12 of the 20 largest state programs as a majority share in the federal government prepaid space saw 35% volume growth for the first half of this year. Stay tuned, we expect to add more names to this list. About a week ago, we announced the first in Canada, a municipal prepaid card program with the city of Toronto.
The City Services Benefit Card program provides recipients with reloadable EMV chip-and-PIN prepaid cards, enabling them to receive their benefits directly to a card. The program offers SMS and email alerts for balances and transaction inquiries, ATM access, online account access, as well as multilingual customer service. While on prepaid, we actually just signed an important deal in the prepaid space, a five-year agreement with Credicard in Brazil to use and launch our IPS platform for prepaid processing. The agreement also guarantees the exclusive issuance of Mastercard for their general-purpose reloadable prepaid cards. That's the first IPS launch of a domestic-use-only program, and it will help Credicard make their debut into the gift and general-purpose reloadable prepaid market. Now we turn to commercial, where we are experiencing strong growth.
Our commercial volume is growing at about 20%, balanced across geographies and market segments ranging from large corporates and governments to small and medium-sized businesses. We have won new business around the globe with many Fortune 500 companies. In fact, currently, almost 40% of the Fortune 500 uses Mastercard commercial products, including Johnson & Johnson, AT&T, Procter & Gamble. On the debit front, we are growing our overall debit business in the U.S., a trend that you've seen for a little while now. Our processed debit transactions grew 58% over the second quarter of 2011, and sequentially better than the 40% growth rate we saw in the first quarter. The value proposition for our debit customers remains strong. We've seen a robust sales pipeline with significant renewals and wins, including some of our biggest earlier customers such as BMO Harris Bank and HSBC.
In the U.S., as you've now kind of seen over the last couple of years, we have made great progress in prepaid, in debit, and commercial credit businesses. We still have work to do in consumer credit, and we're on it. Moving to our activities supporting innovation, particularly around mobile payments, I'm going to mention two new launches. The first, we recently announced an agreement with Deutsche Telekom, creating an important new European partnership. This agreement opens the door to mobile payments for Deutsche Telekom's 95 million mobile customers across 11 European markets. The first consumer rollout will take place in Poland later this year, with mobile payment capabilities embedded in the phone. At the same time, a consumer trial will be introduced in Germany, initially using mobile phone tags and cards. A mobile wallet service will be added by the end of 2013.
In Argentina, Mastercard and Telefónica's first JV recently launched a mobile wallet service. It's marketed under the brand name Wanda. This is the first commercial launch of our JV, spans 12 countries in Latin America with almost 100 million Movistar subscribers. These mobile payment services will be linked to a mobile wallet or prepaid account that will allow for money transfers, mobile airtime reload, bill payment, and retail purchases. Mobile Payment Solutions, MPS, another of our joint ventures, this one with Smart Telecom in the Philippines, will be responsible for developing and implementing this mobile wallet technology and the services. Finally, last quarter, I talked about the progress we've made with our DataCash acquisition. I'm very pleased to add a new highlight. DataCash recently announced that Alipay completed integration with DataCash's international payment solution.
Alipay's online payments platform is already one of the most popular in Asia, serving over 500,000 online retailers. This integration with DataCash will help Alipay expand their international reach by enabling online retailers outside of China to process transactions from Chinese consumers using Alipay's e-wallet service. With that, let me turn the call over to Martina. Martina?
Thanks, Ajay, good morning, everyone. Let me begin on page three of our slide deck, where we'll focus on the non-GAAP figures, which exclude the additional $20 million pre-tax charge we took this quarter related to the U.S. merchant litigation settlement. For the second quarter, we saw solid top-line and bottom-line results. Net revenue grew 9% or 13% on a constant currency basis, driven by strong volume and transaction growth as well as new deals. Total operating expenses increased 6% or 9% on a constant currency basis. Bottom line, we delivered net income of $713 million, up 17% or 23% on a constant currency basis, and diluted earnings per share of $5.65, up 19% or 24% on a constant currency basis. As I mentioned last quarter, we expected to realize some one-time benefits to our 2012 effective tax rate.
Therefore, besides enjoying the positive effects of our prior tax planning initiatives, we also finalized some work which resulted in discrete benefits relating to additional export incentives and the conclusion of tax examinations in some jurisdictions. Cash flow from operations was $641 million, we ended the quarter with cash equivalent, and other liquid investments of about $5 billion. While not shown on this page, during the second quarter, we repurchased about 1.6 million shares at a cost of approximately $671 million. Through July 26th, we repurchased an additional 132,250 shares at a cost of $57 million. We have now completed the previous 2 billion share repurchase authorization and have 1.4 billion remaining of the new 1.5 billion authorization. We will continue to look to repurchase shares on an opportunistic basis.
Let's now turn to page four, where you can see the operational metrics for the second quarter of 2012. As you can see, worldwide gross dollar volume or GDV was up 15% on a local currency basis. U.S. GDV grew 9%. While debit growth in the U.S. remains healthy at 14%, we saw the impact of the lapping of one of our debit wins. Credit volumes in the U.S. grew about 3%. Commercial credit growth remains strong in the high teens, and as Ajay mentioned, we still have some work to do in U.S. consumer credit. Outside of the U.S., volume growth was 19% on a local currency basis, including mid to high teens growth in LAC and Europe, and more than 20% growth in APMEA.
The growth rate of volume outside the U.S. were driven by strength in both Mastercard credit and debit volumes, which were up 16% and 24% respectively. Cross-border volume grew 17% on a local currency basis, including growth rates above 20% in Latin America and APMEA. European cross-border volume growth was in the mid-teens, down just slightly from the previous quarters. Let me turn to slide five. Here you can see that processed transactions were up 29%, similar to the growth rate we saw in the first quarter. You may think that most of the impact is from the new U.S. debit rules, but it's not. On a net basis, less than half of the 29% growth rate comes from the U.S., primarily due to the new PIN debit transactions.
Almost four percentage points comes from new processing from the rest of the world, leaving about 13% as the underlying growth rate. Globally, the number of cards grew 9% to 1.8 billion Mastercard and Maestro-branded cards. Let me turn to page six to discuss our revenue growth in a bit more detail. On an as-reported basis, domestic assessments grew 10% versus GDV growth of 9% on a U.S. dollar basis. Cross-border fee revenue grew 11% versus cross-border volume growth of 9% on a U.S. dollar basis. Taking out the impact of currency, domestic assessments grew 15% and cross-border fees grew 14%. Transaction processing fees grew 19%, driven mainly by the 29% growth in processed transactions. Excluding pricing, the gap between these two growth rates continues to be in the 12%-13 percentage point range.
While there is a little bit of FX impact in this gap, it is mainly driven by all the new PIN transactions that I just mentioned on the previous slide, which come with a lower than average revenue yield. Other revenue grew 7%, a deceleration from recent quarters due to the anniversary of Access Prepaid in April of this year. Finally, rebates and incentives increased 24%, driven by the impact of new and renewed deals as well as strong volume growth. Moving to page seven for some detail on expenses. Within total operating expenses, you can see that General and Administrative expenses increased 10%, driven by higher personnel costs in support of our strategic growth initiatives. These include on-the-ground resources for prepaid, commercial, and mobile, as well as supporting the growth in various markets and expansion into additional markets.
While advertising and marketing expense was down by 7%, or was lower by 7% than last year second quarter on an as-reported basis, it was only about 2% lower on an FX-adjusted basis due to the timing of certain initiatives. Depreciation amortization increased 13%, due primarily to increased capitalized software associated with our strategic projects. Let me now turn to slide eight and let's discuss 2012, starting with an update of what we have seen for the third quarter through July 28th. Globally, our cross-border volumes grew about 14%, roughly three percentage points lower than what we have seen in the second quarter. This was primarily driven by the slower growth in APMEA, likely due to the timing of Ramadan and the impact of the strengthening U.S. dollar when U.S.-issued cards are used overseas, particularly in Europe.
In the U.S., our processed volume proxy for GDV grew about 7%, slightly lower than the 9% that we saw in the second quarter. This was largely due to lower credit and debit volume growth. For debit, the slower growth rate can be primarily attributed to the lapping of one of our debit wins, which I mentioned just earlier. Processed volume growth outside the U.S. was about 14%, which is similar to the 15% growth we saw in the second quarter. In Europe, which I know that's a region of particular interest to many of you, processed volume growth for July was in the low teens versus mid-teens in the second quarter.
Globally, processed transaction growth was about 25%, down from the 29% we saw in both Q1 and Q2 of this year due to the continued evolving landscape in U.S. PIN debit processing as well as the lapping of some of our Netherlands wins. Based on what we see now, let me give you some thoughts for full year of 2012. Before considering the impact of currency, we expect net revenue growth in the second half of the year to be somewhat lower than the 13% growth rate we saw in the second quarter due to really three factors. The first one, the expected timing of new and renewed deals over the rest of 2012. To a lesser extent, tougher comps as a result of the very strong revenue growth we saw in the second half of 2011.
The global economic uncertainty, which could temper both consumer and business spending for the balance of this year, including the July trends that I just talked about. Based on our first half performance, we now believe we will deliver some operating margin expansion this year. However, the total amount of any improvement will depend on several factors, including global economic conditions and investment opportunities that may surface during the second half of the year. As a result, our current expectations for full year 2012 include that G&A growth will be similar to the growth rate we saw in 2011 on a constant currency basis and excluding the impact of acquisitions back in 2011. If you pull all of this out, the run rate is about 11%, and that's what we expect for 2012.
Total A&M spend will be relatively flat versus 2011 on a constant currency basis or lower on an as-reported basis. The quarterly spend as a percentage of total year will be very similar to 2011, also on an as-reported basis. In addition, we may elect to reallocate some funding away from A&M initiatives into G&A to support strategic initiatives in the second half. We may also use some of this quarter's favorable tax benefit to opportunistically invest in the next two quarters. The comments I just made about the 2012 outlook are based on constant currency perspective. Remember, you need to adjust for the impact of currency movements when modeling our as-reported numbers. Let's just assume that the EUR continues to trade around, we picked 122, and the BRL continues to trade around the 2 level for the rest of the year.
We would expect about a 4%-5% percentage point headwind to as-reported net revenue, net income, and EPS growth for both the second half and the full year of 2012. When you look specifically at each of the remaining quarters, this headwind is 5%-6% percentage points for Q3 and 3%-4% percentage points for Q4. We continue to expect a 2012 full-year tax rate of around 31%, primarily due to the one-time benefits you saw in our second quarter effective tax rate, as well as the ongoing contribution from some of our tax initiatives. Finally, we remain focused on our performance objectives for the 2012-2013 period of a net revenue CAGR of 12%-14%, a minimum annual operating margin of 50%, and an earnings per share CAGR of at least 20%.
Let me just remind you, these objectives are all on a constant currency basis and exclude any new acquisitions. Now let me turn the call back to Barbara to begin the Q&A session. Barbara?
Thanks, Martina. 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. Laura?
Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you'd like to withdraw your question, please press star followed by two. Questions will be taken in the order received. Please press star one to begin. Your first question comes from the line of Sanjay Sakhrani from KBW. Please proceed.
Thanks. Good morning. I had a question for Ajay. You mentioned that you'd kind of focus on items that you can control as long as the economic uncertainty continues. I was just wondering if you'd just elaborate on those levers a little bit more, maybe specifically around the operating margin. I think Martina gave some color as to what you guys are anticipating, but what happens if the top line doesn't pan out as you expect it to? Thanks.
Thanks, Sanjay. Let's first discuss the top line for a second. I have tried to lay out that I believe what drives our top line are those three concentric circles, the outermost one being the growth of personal consumption expenditure. A lot of my commentary in the beginning was around how I'm not sure where that'll go. Maybe not at the 5% or 6% that we have been consistently getting over the last few years. Although I don't know for a fact, I'm just assuming that things look a little dodgier on that front than they did a little while ago. The other two concentric circles, one is what percentage of that PCE goes into electronic transactions versus cash. Currently, around 80-something% goes into cash, and I'm still very focused on growing the electronic share in that.
Hence all the effort on government programs, prepaid programs, Social Security, social benefits, all that that you see, as well as small ticket payments, mobile payments, all that comes from trying to change the ratio in that space. The last concentric circle is our share in the 15%. I think if you do the math on the way our transactions are growing, not just because of U.S. debit, you will find that we're making some progress there as well, although we've always got more work to do in that space. I kind of think of those three levers. I think of the outermost concentric circle in revenue being less than easy to predict today and focus on the next two. That's the top line. Now let's talk the other way, expenses.
I think what you'll find us doing is to ensure that we meet our guidance of at least 50% of that operating margin we've talked about. Fortunately, over the last six months, we've been doing better than that. If we find that there are opportunities for us to put money back into strategic initiatives that feed our revenue growth in one of those two opportunities, either to grow electronification or to grow our share within the electronification, we will keep doing that. That's what we are trying to do to keep our franchise growing through all this economic volatility that you see today. Now, within that, if I had a choice, the easiest lever to control is A&M. I've talked about that in the past. G&A tends to be something I want to invest in consistently.
I can't start and stop a strategic initiative without losing a lot of the momentum. A&M, I can kind of work with. That's what Martina was trying to indicate to you in her commentary. We are very focused on that two-year goal of 12-14 percentage points of revenue growth CAGR on a constant currency basis. We're very focused on the minimum 50% operating margin and that 20% EPS growth also on a constant currency basis. That's what our focus is. I'm going to play with every element in the P&L in the meantime to ensure we deliver on that focus and navigate our way through this system and keep growing our share.
Next question, operator.
Your next question comes from the line of Moshe Katri from Cowen and Company. Please proceed.
Hey, thanks. If I'm looking at gross dollar volumes, especially in the rest of the world in credit, it was up 8.3%. Last quarter, it was up 17.6%. Is it possible just to reconcile the differences and maybe just give us a feel on what sort of FX headwinds you had there?
The FX headwinds for volumes were really not different than what we had been calling out, right? We said when you look at GDV, the GDV on a constant currency basis was about 15%. On a U.S. dollar basis, it's about 9%, so you have a six-percentage point headwind on GDV. When you look at credit versus debit, there is really not much difference from that.
The 17.6% should be, if you kind of look at this at an apples-to-apples basis, it should be roughly this quarter should be what? Somewhere in the 12%-13% range, if I adjust it for FX headwinds.
I think directionally you're correct.
All right, thanks.
Your next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed.
Hi, good morning. Just looking at the constant currency 13% growth rate, how much of that growth was from new business wins? As we go forward into the second half of the year, how do we think about the incremental growth rate we'll get from new business wins?
Look, we really don't split new business wins out. You have to have an appreciation. Of course, you can't get to the 13% without having new business wins, but you kind of have to go back to how we build our model over the longer term. I'm going back right to the concentric circles that Ajay has been just laying out. We're starting with personal consumption expenditure growth, and that's typically over a longer period, 5% to 6% per year. This year it's probably a little bit low, so that's lower. That is impacting us. You have the secular trend. The secular trend on a per year basis can be anywhere between four to six percentage points. We haven't finished the year, so I can't really give you yet where we are ending up in that four to six percentage point.
When you add those two factors together, you get into the 9% to 11% growth rate. In order to get to 13%, of course, you're going to have to have a couple of percentage points attributed by the new things that we are doing, and that could be new business wins, that could be expanding into other markets, that could be getting these kind of government programs that Ajay has been laying out. There are a number of things in that number.
Bryan, it's Ajay. You should remember that that five to six percentage points of PCE growth, which Martina was calculating into the nine to 11 that you get to by adding that to the secular growth, we don't know as of today what that five or six will be. We're trying to give you normalized thinking, and frankly, that's how we approach our business in those concentric circles. We don't know what that five to six will be. If you ask me today, it feels lower. Two months later, we might have a different opinion depending on how the world economies are performing. Right now, given all we are seeing in consumer spending, it feels lower than the five to six. I just don't know yet.
Okay. Just lastly, any update on the timing you guys are hearing from the EC on potential recommendations from the Green Paper and any impact that you could see maybe coming out of that if they talk about routing freedom or access to cash balances with the ability to clear and settle for third-party providers? Just trying to think about the potential impact coming out of those recommendations.
We don't have any update on any timing from them. As I told you, actively engaged in discussions with them. We have given them a point of view. We are in constant dialogue with them. We don't have any update with them yet.
Okay, thanks.
Next question, please.
Your next question comes from the line of Darrin Peller with Barclays. Please proceed.
Thanks. Morning, guys. Just wanted to touch base again on rebates and incentives. I know that you shy away from really guiding towards it, but Martina, thanks for the color on the second half, at least overall. Overall, though, in the quarter, they were higher level than I think we expected, and it sounds like you're expecting somewhat of a similar run rate going forward based on the discussion around new signings and overall revenue growth. While I understand there's new deals and renewals, is there any shift in strategy around incentives, maybe similar to what we've seen at one of your competitors or even for merchants or banks and where it's going perhaps than maybe how it was allocated in the past?
No, Darrin. Absolutely not. There's no change in this. You might recall that a year or a couple of years ago, I laid out actually a split of our rebates and incentives between what is really driven from a volume perspective versus what is really driven from a new deal or renewed deal signing. We typically say, when you look at our total rebates and incentives over a whole year, so you have to take a total year, don't just take a quarter.
about 70% of our rebates and incentives is driven really by volume and by the increased business that we're getting. 30% is typically driven by new deals or renewed deals. Even in this quarter, and I don't expect for any part of this year, there will be any difference whatsoever.
Okay. That's helpful. Just expect similar kind of trends in the second half that we saw this quarter, more or less.
Well, as you very eloquently said, it's all embedded in the thoughts that I gave for 2012.
All right. Thanks, Martina.
Just to make sure you get the picture around. Inside your question was aspects of other people doing things with the way they're using rebates and incentives across merchants versus issuers. We haven't changed our strategy, which is get ourselves under the back of those debit cards, get ourselves enabled for them to be used, watch how that goes, do not try and apply rebates and incentives in a broad way. I'm not in the position of protecting a large pre-regulatory change market share. I'm in the business of growing market share in this opportunity and use them surgically and sensibly. Nothing's changed on that picture. We are exactly where we were in that strategic thinking. Nothing's changed.
All right. Thanks, Ajay.
Your next question comes from the line of Tien-tsin Huang with J.P. Morgan. Please proceed.
Tien-tsin, good morning.
Good morning, guys. Always fun to get the name pronunciation. I just wanted to ask Ajay, just give us maybe some high-level thoughts on some of the concessions that were given on the merchant litigation, specifically surcharging and some of the other smaller items.
When I approached this, I think we had this conversation with the investor and analyst community some time back as well, and I was talking about how I would be reluctant to agree to long-term changes in the methodology by which interchange is computed and used. We did agree, as you know, one portion of this is a short-term change. The surcharge angle, frankly, for a long time in Mastercard, surcharging has been going on in some parts of the world, partly promoted by legal changes in those countries. Discounting for cash has been going on for a long time, and we have never enforced anything differently from that. I still share the belief that all these kinds of things create friction for a consumer, for a merchant, for everybody in the electronification of payments.
When I talk about that second concentric circle of secular change, these things create friction. Friction is not good for increasing the speed of that secular change. Yet the merchants were very clear that the ones who represented with us and negotiated with us, that without that, there was no conversation. We came to the point where it's either to agree to part of that from my perspective. This is only mine. By the way, this is not the other parties in the negotiation. I'm not trying to speak on behalf of the banks. I'm not trying to speak on behalf of Visa. This is me, Mastercard.
We believe the best thing to do was looking at our experience of surcharging in other markets where frankly, it didn't really lead to a great deal of actual surcharges being placed other than in a couple of kinds of areas where cash isn't quite able to compete. For example, online airline bookings and the like. Even there in Australia, the Reserve Bank of Australia stepped in recently and created caps on the level of that surcharging, realizing that this was not quite what they wanted to have happen, I'm assuming, which is why they stepped in.
When I think about that here in this agreement, we've also managed to get in some of those protections, the cap on what they could charge, the declaration to the consumer with clarity both on the receipt and in the store, the level playing field concept that we think we've got in there. All these were attempted as a way to sort of try and box the issue while moving forward. The bigger picture of tackling the 80-something percent of transactions that are still in cash can keep on being pursued instead of all of us being tied up in the passion behind this issue. That's kind of how I approached it, Tien-tsin. It is friction. I don't like the friction, but I'm trying to minimize it with as much lubricant as I can put in the system.
Understood. Thank you.
Your next question comes from the line of Julio Quinteros with Goldman Sachs. Please proceed.
Hey, Martina. Just to go back to the expenses, there's a lot of puts and takes on the constant currency and reported, especially on the advertising and marketing side. Can you just go back through those real quickly on the expectations for the second half as it relates to the advertising and marketing expenses, both including and excluding the currency?
what I really said that you should be expecting that A&M spend will be relatively flat versus 2011 on a constant currency basis, that would tell you because of the FX impact that it would be lower on an as-reported basis. Also, I tried to give you a little bit more help on your model from a quarterly perspective.
Really from a quarterly modeling point of view, you should be really thinking about the same kind of rate of usage as in 2011. Now I also said, and Ajay had re-emphasized, we are looking at our strategic investments and that might entail moving things around from A&M to G&A. That is not included in these comments. We will make those decisions as we go along in the next couple of quarters. This is what I see. This is the best that I'm seeing at this point.
Okay, got it. Then maybe Ajay, on the credit side, just in terms of U.S. credit and having some work to do, what does that comment entail? As you think about having some work to do in U.S. credit, what exactly do you guys think needs to be done there?
Two, three years back, Julio, if you looked at our position in the United States market two, three years ago in all the different product categories, we were not in the best position in terms of either debit, signature or PIN. We were not doing as well as we wanted to in commercial cards. We were doing reasonably well in prepaid, although I think we could have accelerated that momentum. We were not doing as well as we wanted to in consumer credit because we are reliant on a portfolio of banks that in their mix has been going through some degree of difficulties over the financial crisis. What I've tried to do over these years is to take each of those four product categories and change our position in the market.
In prepaid, with all that we've done with these governments as well as our relationships with a number of the prepaid program managers and other issuers, I think we've made real progress from the Social Security Administration of the U.S. to these state-level programs. All those we kind of feel good about. In debit, we've actually done reasonably well over the last one year, including the wins before the regulatory change with SunTrust and Sovereign and all those pieces. In commercial, we actually feel pretty good. We are making real progress on large corporates and small businesses. It's in consumer credit that I still don't think that I can tell you that I've made the breakthroughs. I have wins. I have wins with regional banks. I have wins with independent banks and credit unions. I have re-confirmations of my position and market share in some of the biggest banks.
I'm winning little deals along the side. I'm not losing anything, contrary to what anybody else might say. I'm not losing anything. I'm gaining a little bit here or there. It doesn't excite me. It doesn't satisfy me. There's work to be done in consumer credit. That's the tonality I was trying to get across.
Understood. Thank you.
Your next question comes from the line of Rod Bourgeois with Bernstein. Please proceed.
Yes. Over the last year, your growth in Europe has been helped by domestic processing wins, and our assumption has been that you may not have additional SEPA-related wins on the near-term horizon, even though SEPA seemingly could still create long-term opportunities if the regulatory environment doesn't change too much in Europe. With that as the context, can you give us your thoughts on the short-term and the longer-term opportunities for wins in Europe related to SEPA, given that you've had a pretty good track record there over the last year or two?
That's a good question. Our SEPA volumes in this last quarter, the previous quarter they were up 200 something %. This last quarter is closer to less than half of that. That's because of the lapping of some of those wins. It's very tough for me to tell you how I think about this shorter term because the nature of these wins in SEPA tend to have a peculiar lumpiness in them. We're talking to so many of these parties at the same time, two kinds of results come out of it. One is a constant dribble of incremental transactions from many countries, Germany, France, Belgium. Those are happening even today. We're kind of continuously getting some benefits from them. I've got the lapping effect of the big wins in the Netherlands that we had last year.
In the middle of all that, if one or two of those big discussions turn into a deal, it will happen in 60, 90 days, not in 350 days. I won't get 350 days notice on it. It may not happen, by the way, in the next quarter. Don't get me wrong. It's just that I don't know when to predict how the damn thing will convert from a conversation to a real deal. I don't know how to give you a better feeling of that number for the shorter term. It's the nature of our business with longer selling cycles, when the deal happens, it happens.
I could say that if you looked at it consistently over a period of time, absolutely, we think our product and our capability with Maestro, with Debit Mastercard, our technology, and the fact that we have one global platform that you can take your Maestro card and use it anywhere in the world, let alone not be able to use it outside of Germany, in Europe. Forget about going to Latin America and using it. When you can do all that, I believe that that is a strong starting point to keep winning business on this line in SEPA. That's the dialogue we're going ahead with. Martina, you want to add something?
Yeah. Rod, just from a nearer-term perspective to expand a little bit from SEPA, when you look, for instance, at the Nordics, we've been working on the Nordics in Europe for a considerable amount of time and have just announced a number of deals. Last year, the Swedbank deal. This year, we think that we have a follow-on on that with another bank. We are starting to really work out country by country to be getting these kind of wins and putting our cards into the market. You can't just look at each individual SEPA country. You're going to have to think about the overall strategy.
Well, just a quick follow-up on that. When you look at the seemingly some uncertainty created by the Green Paper and then the underlying motivation of the EC, are those developments making it more difficult to proceed with SEPA-related wins, or is there really no change?
Actually, remember, in many ways, what we are doing with all these actually fit directly into what the EC wanted to have done when SEPA was created, which was to break down the monopolies of the domestic debit schemes and allow for cross-border intra-EU as well as global players to come into play in that space so that you could increase competition, increase innovation, and increase efficiency. For a long while, those conversations wandered off into a local domestic European scheme like Monnet. That still keeps getting talked about somewhere in the fringes, but for a long while, that's the only questions you guys asked me. I kept telling you, I don't know for sure whether that will also happen. All I know is it's a moving landscape. We have a terrific product with great efficiency, priced right. That's how we won the Netherlands.
That's how we are winning business in different parts of Europe, including the Nordics data that Martina was talking about. I'm pretty confident that that still holds true. That's about it, Rod.
Excellent. Thanks, guys.
Your next question comes from the line of Glenn Fodor with Morgan Stanley. Please proceed.
Hi. Good morning. Thanks for taking my question. Ajay, with regard to the settlement, as you stated, there's clearly a lot of emotion out there among some of the parties. Can you tell us, is there a mechanism for the defendants, either the networks or the issuers, approaching the large merchants who are putting out these headlines these days and helping ameliorate their concerns? If so, have those efforts started?
Well, I'm not going to go into too much detail there, but I will tell you this. Dialogue with all these parties is a consistent part of what we are doing. The fact is, not everything about this settlement will suit every individual involved because there are those compromises, and some parties on both sides are more willing to make some of those compromises. Others are not. That's the first basic principle. As far as the actual mechanisms are concerned, I've got Noah here. Noah, do you want to add something to what Glenn was asking?
Sure. Thank you. Hi, Glenn. There's a process in court for merchants to actually express their desire to opt out of the settlement, which actually hasn't occurred yet. That will follow the preliminary approval by the court, which should take place in the fall. At the end of the day, we're confident that the settlement will receive approval from the court, both from a preliminary approval perspective and from a final approval perspective. Just like in the Walmart case, there tends to be, in all class action cases, merchants that choose to opt out.
We're confident that at the end of the day, the settlement will be accepted by the court, and notwithstanding the fact that different merchants have different views, we will reach a resolution that should really turn the corner on the years of litigation and allow us to get back to doing business with the important merchant community.
Thanks for the call. I appreciate it.
Your next question comes from the line of Bill Carcache with Nomura. Please proceed.
Good morning. I have a question on buybacks. Some companies look at buybacks as simply a vehicle for returning capital. Others tend to look at them more opportunistically if there are share price declines. Can you remind us a little bit on your philosophy and whether you would view potential pressure that your shares might come under to the extent that from a macro perspective there's some weakness, and then whether you would look at that as an opportunity to get more aggressive on buybacks?
Okay, let me just talk a little bit about our philosophy. Let me start a little bit in terms of how we think about capital allocation anyhow, right? First of all, we're looking at allocating capital to the business. That is our first most focus. Secondly, we're looking to deploy capital from what we call inorganic way, i.e., making acquisitions, investing in other businesses in order to further the goal that Ajay has laid out to really drive our revenue growth. Last but not least, if we have excess cash available, we're certainly very open to be returning that to shareholders. At this point in time, our preferred method of returning it to shareholders is really through share repurchase programs. As you've seen, we have been doing that very consistently in the market.
In fact, I think we've been spending close to $1 billion just in 2012 in terms of repurchasing our shares. The one thing that I just want to always be sure is that we do pick shares up in an opportunistic manner over a certain time period. You can read out from that obviously an opportunistic pickup of shares means that we are watching very closely where the share price is going, we move in and do things as we can. We can't do that always, okay? I just want to caution that a little bit given that we are a publicly traded company. There are certain trading windows that are open for us where we can do that in a very active manner.
However, when we get into what we call a blackout period, which is moving closer to a quarter end and an earnings release, we have to file things like the 10b5-1 plans. That means we have to predetermine what kind of trading activity we want to have on our stock in the market. Of course, we do formula-based kind of activity. We try to mimic in these plans, what we otherwise would be doing when we can go actively into the market every day. I hope that gives you a little bit of a background on how we think about it.
Yeah, that's helpful. Thanks, Martina. If I may ask Ajay a follow-up. Ajay, you gave a little bit of an update on Telefónica. Can you talk a little bit about whether your pursuit of money transfer solutions with other partners around the world creates any kind of tension with Western Union, given the work that you're doing with them? Basically, as you look forward also, do you expect these tensions to intensify? Thanks.
Yeah. Look, I actually am doing all this with great partnership with Hikmet at Western Union. In fact, I think there are ways that Western Union and Mastercard together could offer an even stronger opportunity to a number of these money transfer opportunities through the phone systems. I've always believed that the phone companies, the operators as well as the hardware folks, can be an integral part of how this new method evolves rather than an either/or. I don't see the same kind of tensions. I actually see all of us bringing different capabilities and skills and strengths to the table. If you can stitch those together well, it actually works pretty well.
That's the kind of thing we've been doing for the past couple of years, whether it be with Google, whether it be with Telefónica, whether it be with Airtel and Zain or with Deutsche Telekom. We've kind of got issuers, telecom companies, and us to work together in some ways to discover this whole mobile payment space. I think there's another set of partners, which is the future set of partners around vouchers, rewards, loyalty, e-receipts. All those will also add value to this whole mobile payment space and money transfer space. I think what we do well is we build ecosystems. We make partners work together. That's our job. If I start doing an either/or, I would've forgotten our heritage as a company.
Next question, operator.
Your next question comes from the line of Craig Maurer with CLSA. Please proceed.
Yeah. Hi. I have two questions. The first is, in terms of U.S. credit, it would seem that the banks that are focused on issuing cards on your largest competitor are consistently taking share from banks that are issuing on Mastercard. At this point, is this a somewhat unavoidable circumstance in the U.S. as I'm not sure there are any major credit portfolios that are up for renewal at any point soon? Secondly, a question on Europe. Yesterday's antitrust announcement against Visa Europe had a unique twist in it, in that it was also discussing domestic interchange in certain countries. As I understand it, Visa and Mastercard both have domestic interchange rates in certain countries in Europe. If they do happen to win this case against Visa Europe, do you see this as setting precedent to eventually approach Mastercard on domestic interchange? Thanks.
Craig, the first part, the part about credit in the U.S. You're absolutely correct that the mix of the portfolios with various competitors, as well as the Amex GNS business, all those mixes put together are part of what you're seeing in that credit marketplace, it may change as different banks have different appetites for growing their business and cards. It is where it is today. One of the things that we are working with is that circumstance. I don't quite understand the commentary about no possible portfolios being available. I think that I'm just going to kind of leave that out there with you. We keep getting maybe not huge portfolios, which I would like to. We keep getting new business from a number of banks that traditionally would've been only issuing somebody else's cards.
I think that's true, by the way, also of those banks who've traditionally been issuing our cards. It's in the interest of an issuing bank to find a way to manage to work with more than one network. It suits them. It gives them a better position. It gives them a better capability of constructing their business model. When I was a banker, that's how I thought about it. I am somewhat less clear on that part of your question. That's what we're working our way through. Will it change in a day or two? No. That's the nature of our business. It's a business that has a longer selling cycle. Within the marketplace in the U.S., there are some portfolios that are available, some that are not. Newer ones are normally available at most banks.
It's a mix of all those things that we are working our way through. We worked our way through the same situation with commercial, in a way with prepaid, and of course, in the case of debit, in some cases, we were able to get a big deal. In others, this regulatory environment change provided an opportunity to do something. We're kind of working our way through that. That's how I view that consumer credit question. Noah, would you like to take on the EU and Visa question a little bit?
Sure. I'd be glad to
There is a difference, as I understand Visa and their interchange fee structure setting in Europe compared to ours. Visa's cross-border interchange fees have application to domestic jurisdictions. As I understand the scope of the European Commission's concerns with Visa, that's why it relates to both the cross-border rates as well as their domestic rates in some countries. We don't have that approach, so we set individual domestic rates as well as a cross-border rate. The case that the Commission brought against Mastercard only relates to the cross-border rates. We, as you know, are appealing from the decision from the general court. In the meantime, to specifically answer your question, yes, there is the potential for some pressure from domestic competition authorities. We will continue to dialogue with them, but we think we have, as I said, a strong position on our appeal.
Next question, operator.
Your next question comes from the line of Moshe Orenbuch with Credit Suisse. Please proceed.
Great, thanks. I was hoping, Ajay, to kind of return to that U.S. credit because given that you'd said mid-teens from the commercial side, it just seems like the consumer side might even be flattened down at this point. I appreciate the comments that you made about banks kind of switching back and forth. Maybe talk a little bit about if you've got specific plans to kind of bring some of that volume back in the second half of the year.
You've got to be kidding if I'm going to give you specific plans. That's a good try, Moshe. I'm going to give you full marks for that one because you led up to it beautifully. I'm not, I'm sorry, I can't answer that question. You know that. Just nothing that I can tell you that I will suddenly produce a rabbit out of the hat tomorrow morning. We've worked very hard in the other areas, we're working very hard on this one. We've got a constant drumbeat of pipeline out there, we're at it. Don't take all this out of context. I was trying to provide that color to enable you to understand how I viewed our position in the U.S. market over the last few years.
I viewed our position two, three years ago, a bit like Chris McWilton laid out at one of our Investor Days, where we had, frankly, we had lost share in debit, signature and PIN. Our credit position was what it was because we were strong with certain banks that were mostly credit card issuers. We were not strong with some banks that were more debit and credit, as in a more holistic, money-centered approach. Those banks got sold out by and bought by other banks that were traditional Visa banks. That didn't help our position. Our commercial position was not where it wanted to be, despite our very good strengths in the commercial product, from Smart Data as a tool to the fact that our acceptance is way beyond that of the largest players in commercial.
All you have to do is travel outside of the United States and feel that pain. In many ways, I felt we weren't taking full advantage of our capabilities in those spaces. We've been making progress on all of them. In that context, in my own personal scorecard, I don't think consumer credit has made as much progress as commercial, prepaid, and debit. That's the context in which I was speaking.
Okay, thanks.
Operator, I think we have time for one last question.
Your next question comes from the line of Jason Kupferberg with Jefferies & Company. Please proceed.
Thanks, guys, for squeezing me in. Just a clarification and a question. The clarification was just what was the pricing impact on revenues in the quarter? My question is, within Europe, I know you said low teens process volume growth in July, still robust, slipping a little bit versus Q2. Can you give us any qualitative sense underneath that number between debit and credit in Europe, just if there's been a divergence in the relative growth rates between those two? I know you won't give us the exact numbers, but just any qualitative trends you can speak to on credit versus debit in Europe as the macro unfolds there.
Okay. Jason, I can do that. First of all, from a pricing contribution, that was about two percentage points, both on the 9% as well as on the 13% growth rates for revenues. There's really no additional pricing in there. It all came out from what we had put in place last year as well in January of 2012. From a European, little bit more clarification point of view, we're really seeing no slowdown from a debit point of view. All of the numbers that we're seeing are more on the credit side. When I look at the underlying countries, there are really two countries that are still growing. They're still growing very nicely, but the growth is a little bit less than what we had in the prior couple of quarters. One is the U.K., and the other one is France.
Very helpful. Thank you, guys.
Yeah.
That concludes the Q&A section of the call. I would like to turn the call over to management for closing remarks.
Let me just leave you with a few of those thoughts. As I've just been saying in a few questions and answers, I think we've made really solid progress across the globe in the first half of 2012. We feel really good about U.S. PIN debit in particular, even though we don't yet know how those volumes will all finally shake out for all the reasons we've discussed in the past. Of course, those incremental PIN debit transactions come at a lower-than-average yield, as Martina talked about, but with good profitability. As Martina also mentioned, we think the second half of the year has got more difficult comparisons as the year progresses as we lap our strong second half of last year.
There is the potential for us to increase our level of investment depending on how much room we have in our P&L versus the kind of commitments we have out there for our operating targets. That room could come from things such as stronger-than-expected top-line growth or the potential lower tax rate that Martina has been talking about. There is no shortage of growth opportunities in this business. The key is to evaluate as many as we can and then act on the ones that provide the best potential for maximizing our long-term growth and let anything left over drop straight to the bottom line. That's what we are focused on. Overall, we're working as hard as we can to deliver another good year and meet those performance objectives despite all these continuing uncertain economic conditions.
With that, thank you for your time today, and thank you for your faith in our company.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.