MasterCard Incorporated (MA)
Q1 2009 Earnings Call Transcript
May 1, 2009 9:00 a.m. ET

Executives

Barbara Gasper – Group Executive of Investor Relations
Robert W. Selander – President & Chief Executive Officer
Martina Hund-Mejean – Chief Financial Officer
Melissa Ballinger – Corporate Controller

Analysts

Andrew Jeffrey – SunTrust Robinson Humphrey
Moshe Katri – Cowen and Co.
Craig Maurer – Calyon Securities
Anurag Rana – Keybank Capital Markets
Tien-Tsin Huang – JP Morgan
James Kissane – Bank of America/Merrill Lynch
Jason Kupferberg - UBS

Presentation

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 MasterCard earnings conference call. (Operator Instructions) My name is Mylalia (ph) and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require audio assistance please press * followed by the 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Ms. Barbara Gasper, Group Executive of Investor Relations. Please proceed.

Barbara Gasper – Group Executive of Investor Relations

Thank you, Mylalia. Good morning and thank you all for joining us today either by phone or webcast for a discussion about our first quarter 2009 financial results. With me on the call this morning are Bob Selander, President and Chief Executive Officer; Martina Hund-Mejean, our Chief Financial Officer and Melissa Ballinger, our Corporate Controller. Following comments by Bob and Martina highlighting some key points about the quarter we will open up the call for your questions.

This morning’s earnings release and the slide deck that will be referenced on the call can be found in the Investor Relations section of our website www.mastercard.com. The earnings release and slide decks have also been attached to an 8K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for one week until May 9th. 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 will now like to turn the call over to Bob Selander. Bob?

Robert Selander – Chief Executive Officer

Thanks Barbara and good morning everyone. Despite the economic realities that we face today this has been a solid quarter for MasterCard. Our volumes have been impacted by significant headwinds such as slower cross-border travel, lower gas prices and an appreciating dollar. But our business model remains resilient as we continue to benefit from the secular shift from cash and check to electronic payments. Our focus remains on ensuring that MasterCard is well positioned for long-term growth. Our resources and operations are aligned to support our customers as they look to reprioritize their business strategies and we are prepared to take advantage of any opportunities as they arise. While our net revenues for the quarter declined 2.2% on an as reported basis, net revenue grew 1.8% on a constant currency basis. In light of the softening top line contribution I am pleased to report that we have taken considerable cost reduction actions to deliver a strong operating margin of 48.6%, an improvement of 5 percentage points over the first quarter of 2008 and the highest quarterly margin to date that we have recorded as a public company.

Now if you could just turn to slide two, let me spend a couple of moments on the economic situation and a little bit on business update. As I have stated before, we don’t believe there is any reason to assume that the economic slowdown across the world will improve for the balance of this year. However, our business model and global diversity continue to provide a good degree of resilience as we navigate through the current environment. As we look at a number of economic indicators important to our business we still face challenges around unemployment, retail sales and the state of the travel industry. The U.S. official unemployment rate increased in March versus February of this year to 8.5%. It is reasonable to think this trend will likely not plateau until some in 2010. It is going to take awhile for the economic stimulus to make an impact on the wider U.S. economy and restore confidence for both business and consumer spending to return to rates of growth again. Likewise, the unemployment rate in the Euro area reached 8.5% through the end of February and we expect this number to rise over the remainder of the year before stabilizing.

Turning to the latest MasterCard spending pulse data for the U.S. retail sector, in general the year-over-year comparisons continue to show large declines but the pace of the contraction appears to be stabilizing. Total retail sales excluding autos and gasoline showed a year-over-year decline of 2.5% in March. This is fairly comparable to the 2.3% decline in February. However, certain industries contracted significantly with furniture and furnishings down almost 24%, electronics and appliances down 27% and apparel down 23%. In addition, some of the industry figures are negatively impacted by bankruptcies and store closings such as Circuit City in the electronics and appliance category and Linens ‘n Things in the furniture and furnishings sector.

U.S. travel is continuing to deteriorate with historically low year-over-year comparisons in airlines and lodging. U.S. airlines posted their third consecutive double digit sales decline, decreasing by 17.4%. IATA, the International Air Transport Association, has noted that while global passenger travel has fallen less precipitously compared to freight and shipments, it expects passenger volumes to be down 5.7% for the year. While the rate of decline in airline sales has slowed, lodging continued to deteriorate and was down 23% in March versus a year ago. Gasoline sales are down significantly due entirely to the 40% year-over-year decline in gas prices. But pumping is recovering to show consistent year-over-year gains for the past two months.

There are some bright spots. The Conference Board reported earlier this week that U.S. consumer confidence jumped from 26.9% in March to 39.2% in April which is a higher gain than economists were forecasting. Central bankers continue to respond to the crisis by injecting liquidity to ease credit and monetary conditions. Finally, many governments continue to provide various forms of stimulus into their economies and their banking systems. We think this is an important foundation upon which consumer confidence will be built in future quarters. Turning to some of our most recent business trends, when we look at MasterCard processed volumes and transactions through the first four weeks of April we saw the following. Cross border volumes reversed the declining trend we saw in the first three months of this year and stabilized at about flat. Clearly it is too early to estimate what impact the current flu crisis could have on cross-border travel. Going back to early 2003 there was an impact on our Asia Pacific business from SARS for a period of about 6 to 8 weeks. However, SARS had no material impact on MasterCard’s overall financials.

U.S. processed volume continued to decline at a slightly higher rate than what we saw in the first quarter which we believe is primarily due to current lower gas prices relative to April of last year. We need a few more weeks of data to better assess whether there are persistent, underlying signs of stabilization. Process volumes for the rest of the world are still growing albeit at a lower rate than in the first quarter. Processed transactions continued to grow in the 7% to 8% range, a slightly faster pace compared to the first quarter of 2009, driven by more transactions in the United States relative to what we saw in the first quarter.

Moving on to the regulatory front, as many of you are aware we reached an interim arrangement with the European Commission about a month ago regarding our intra-regional, cross-border consumer interchange fees for the European Economic Area. We are pleased that the Commission has recognized the legitimacy of interchange fees and opened four party payment systems, but we still consider these levels of interchange too low. As you know, cross-border transactions count for less than 5% of our European volumes. We are continuing our appeal in the Court of First Instance against the Commission’s December 2007 decision. This interim arrangement creates more clarity for the market and for SEPA allowing us to focus on our customers and to continue to provide solutions that benefit the millions of European cardholders and merchants who rely on our products and services.