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Executives

Kathryn McNamara Corley

David W. Nelms - Chairman and Chief Executive Officer

Discover Financial Services (DFS) 2013 Annual Shareholders Meeting April 17, 2013 10:00 AM ET

Operator

Good morning, and welcome, everyone. I'd like to call the 2013 Annual Shareholders Meeting of Discover Financial Services to order. My name is David Nelms. I'm the Chairman and Chief Executive Officer of the company, and I'll be serving as chair of the meeting.

We'd like to welcome all of our shareholders and guests and thank you for being with us today. We do appreciate your interest in the company and for your continued support. Kelly McNamara Corley, Executive Vice President and General Counsel, will be serving as Secretary. And I'd also like to introduce Mark Graf, who's our Chief Financial Officer. We also have with us Christine Ulrich [ph] and Carol Larson representing Deloitte & Touche, our independent registered public accounting firm, who'll be available to answer questions during the Q&A session. My fellow board members in attendance are, and please stand when I say you name, Larry Weinbach, Chairman of Great Western Products Holdings and Managing Director of Yankee Hill Capital Management. Larry is our Lead Director and chair of the Nominating and Governance Committee. Follin Smith, retired Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Constellation Energy Group. Follin is chair of the Audit and Risk Committee. Greg Case, President and CEO of Aon Corporation. Greg is chair of the Compensation and Leadership Development Committee. Jeff Aronin, Chairman and CEO of Paragon Pharmaceuticals. Mary Bush, President of Bush International and Senior Managing Director of Roth Capital Group. Cynthia Glassman, former Undersecretary for Economic Affairs of the U.S. Department of Commerce and former Commissioner at the U.S. Securities and Exchange Commission. Rick Lenny, operating partner with Friedman Fleischer & Lowe and former Chairman, President and Chief Executive Officer of The Hershey Company. Tom Maheras, founding partner, Teagan Capital Management. Michael Moskow, retired President and CEO of the Federal Reserve Bank of Chicago. I would also like to introduce Mark Thierer, a new nominee to our Board of Directors this year. Mark is Chairman and Chief Executive Officer of Catamaran Corporation. Catamaran is the industry's fastest growing pharmacy benefits manager, which provides healthcare information technology solutions and manages more than 250 million prescriptions each year on behalf of more than 25 million members. Thank you, all.

Members of the Investor Relations team will also be available to answer your questions after the meeting. You can find members of the Investor Relations team located at the back of this room. Please also visit our Investor Relations website. It's a great resource for financial information about the company. The web address is discoverfinancial.com.

Our program sets forth today's agenda and the procedures we'll follow. First, we'll consider the proposals you are voting on, then I'll provide a brief update on the company. We'll then hear the preliminary report of the inspector of elections and conclude the formal part of the meeting. After that, we've reserved time for questions not related to our proposals. Our meeting will require shareholders wishing to raise questions and topics other than the proposals to wait until that time. The rules appear on the back of your program. I'm now going to ask Kelly McNamara Corley to report on the notice of the meeting and the proxies received.

Kathryn McNamara Corley

Thank you, David. The notice of the meeting and the proxy materials were mailed to Computershare, the company's transfer agent, beginning on March 7, 2013 to all shareholders of record as of February 19, 2013. As a result, the meeting is being held pursuant to proper notice, proxies representing more than 86% out of the 495,396,127 shares of the company's outstanding stock eligible to vote have been received. And accordingly, a quorum is present and the meeting is duly constituted and should proceed.

Unknown Shareholder

Mr. Chairman?

David W. Nelms

Yes, sir.

Unknown Shareholder

Martin Glasser [ph], Chicago, a long-time shareholder of the company. Once again, I am pleased to be able to attend the annual meeting of Discover Card. I have a question on the notice of the meeting. I would like to know if there's been any bylaw changes since last year's annual meeting that you haven't disclosed to the shareholders.

Kathryn McNamara Corley

No, there's been no bylaw changes since the last shareholder meeting.

David W. Nelms

We now come to the part of the meeting where the shareholders consider the matters set forth in the proxy statement. Voting on all matters is by actual account of the votes cast by ballot or proxy.

Computershare shareholder services has been appointed as the inspector of elections for the meeting. Most shareholders have already voted by proxy and your proxy votes have been tallied. For those of you who have not yet voted or who want to change your votes, filling out a ballot and giving it to the inspector will have the effect of revoking any earlier proxy that you gave. The polls are now open and will close following my remarks. Please raise your hand if you need an usher to bring you a ballot. The first item of business to come before the meeting is the election of the directors and the following 11 people have been properly nominated by the board: Jeffrey A. Aronin; Mary K. Bush; Gregory C. Case; Cynthia A. Glassman; Richard H. Lenny; Thomas G. Maheras; Michael H. Moskow; me, David W. Nelms; E. Follin Smith; Mark A. Thierer; and Lawrence A. Weinbach. The board recommends that you vote for each of the directors on the ballot. Do I hear a nomination?

Unknown Shareholder

My name is Jennifer Joseph. I'm a shareholder and an employee, and I move the election of the directors proposed under proposal one in the company's proxy statement dated February 22, 2013.

David W. Nelms

Thank you. Is there any discussion of this matter?

Unknown Shareholder

Thank you, Mr. Chairman. Martin Glasser [ph] , Chicago, a long-time shareholder in the company. I needed a warm up before so -- because it's so early in the morning. The first thing, I want to compliment the management of having the directors sitting facing the shareholders during the meeting. Many -- I attend many, many Annual Shareholders' Meetings in many, many companies. All you see is the directors -- the backs of the directors. So it's nice to see here at Discover Card procedure where directors face the shareholders. But I have another question, and you brought up this -- I'm a very good listener and you brought up Investor Relations people are here. I have a claim against or a comment against the Investor Relations group based on the annual report that's sent out to the shareholders. It's customary for many annual reports to have the pictures of the directors in the annual report, and some of the annual reports even have pictures of the top employees of the company. And so I hope by next year's annual meeting that the Investor Relations department -- or, urge that the printing of the annual report, we see pictures of the directors and the top employees of the company. Talking about employees while I'm here, I noticed we must be doing very good here at Discover Card because moving into the parking lot, I saw many more employees today than I did a year ago when I came to the shareholders meeting and will probably ask the question later on in the meeting about the number of employees today compared to a year ago. Thank you.

David W. Nelms

Thank you. The second item of business to come before the meeting is the advisory vote to approve named executive officer compensation. This proposal is discussed in the company's proxy statement and the board recommends approval for this proposal. Is there a motion from a shareholder?

Laura Gingiss

My name is Laura Gingiss. I'm a shareholder and an employee and I move the advisory vote to approve named executive officer compensation proposed under proposal 2 in the company's proxy statement dated February 22, 2013 be approved.

David W. Nelms

Thank you. Is there any discussion of this matter? The third item of business to come before the meeting is the ratification of the appointment of the company's independent registered public accounting firm, Deloitte & Touche. This proposal is discussed in the company's proxy statement and the board recommends approval for this proposal. Is there a motion from a shareholder?

Rob Weiss

Yes. My name is Rob Weiss. I'm a shareholder and an employee and I move that the appointment of the company's independent registered public accounting firm, Deloitte & Touche, be ratified.

David W. Nelms

Thank you. Is there any discussion of this matter? The discussion of matters for shareholder consideration is now closed and the polls will remain open for a few more minutes. Now I would like to talk to you about Discover and how we are working to deliver value to you, our shareholders. Before I dive in, I'd like to remind you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in the company's Form 10-K for the year ended November 30, 2012, which is on file with the SEC. Discover's strategic objective is to be the leading direct bank and payments partner. We've made great progress towards achieving this objective in the 5 years since we became an independent company, leveraging all of our unique assets and capabilities. We've moved beyond credit cards to operate broad range of direct banking and payments product. Our product innovation has accelerated to become industry leading. Recent examples include our new flagship Discover Credit Card, our new Cashback Checking account and our agreement to bring PayPal to all of our U.S. point-of-sale merchants. We're growing faster than our peers and we're causing people to think differently about the Discover brand. I feel we're well-positioned to realize the full potential of Discover as the leading direct bank and payments partner.

Here are some of our key financial results in 2012. We delivered record profits of $2.4 billion of net income, with a strong ROE of 26%. We drove record network sales volume and delivered industry-leading loan growth. We achieved an all-time low total net charge-off rate. In student lending, we achieved approximately $1 billion in originations. We launched the Discover Home Loans product and we returned $1.4 billion to our shareholders. Plus, last night, our board approved a further 43% dividend increase to $0.20 a share. Quite a year.

These 2 charts highlight what an extraordinary year 2012 was in our core card business. On the left, you can see how we've led the industry in loan growth. Our investments in growth paid off even as many of our largest competitors continued to see their portfolios' strength. And on the right, you can see how we also led our peer group in terms of profitability. Our focus on prime credit and our strong execution is allowing us to grow faster than our competitors and achieve higher returns at the same time. I am more convinced than ever that direct banking is the future winning business model for consumer banking in the United States. The chart on the left illustrates how Discover's direct model is more efficient than that of the traditional brands' banking models. Branches, of course, are very expensive to run and our unique focus on the higher growth, lower-cost direct channel and direct products enable Discover to establish and maintain a sustainable competitive advantage. Also, on the right, you can see that consumer preference is now clearly in the favor of the direct model. Consumers are moving away from branch banking and we support all the preferred banking channels except the one that is shrinking the most. In fact, today, you can do pretty much everything you would do in a branch, either online, on the phone or at an ATM and you can bank more conveniently 24 hours a day with Discover.

To get a sense of our recent progress in payments, let's compare our networks in 2012 to how things stood in 2007. Since then, our business has grown tremendously from a largely domestic network to the third largest global payments network in the world. Our volume in 2012 was 65% higher since 2007. Our 2012 profit before tax is nearly 5x higher than that of -- than in 2007, and our ATM and point-of-sale acceptance have both tripled. Since acquiring Diners Club in 2008, we've signed several network alliances which have expanded our reach. We now operate in 185 countries and territories around the world. We've taken some very big strides in a short period of time. Our recent outstanding results are clearly reflected in our share price performance. Our shares increased 30% in 2011 and another 61% in 2012. That achievement compares favorably to our competitors. Overall, we feel very good about Discover's achievements and our prospects for continued success in direct banking and payments and I hope you feel the same way. We remain committed to maximizing shareholder value by continuing to deliver outstanding customer value and service.

With that, I will be happy to take your questions.

Actually, let's finish the poll. At this time, the polls are closed. The next agenda item is the preliminary report of the inspector of elections. Kelly, I'll ask you to report the vote.

Kathryn McNamara Corley

The preliminary report of the inspector of elections indicates that not less than 96% of the shares voting for or against the director nominees have voted for the director nominees. Approximately 95% of shares represented at this meeting have voted for the advisory vote to approve named executive officer compensation, and approximately 97% of the shares represented at this meeting have voted to ratify the appointment of Deloitte & Touche, LLP as the company's independent registered public accounting firm. We will file a report with the SEC containing the final tally in the next few days. And David, that summarizes the preliminary report of the inspector of elections.

David W. Nelms

Thank you, Kelly. This concludes the formal part of our shareholder meeting. The annual meeting is now officially adjourned. We will now proceed with the question-and-answer session and [indiscernible]. And they have a microphone. We'll be happy to take as many of your questions as time allows. In fairness to others, please limit your questions to 3 minutes.

Question-and-Answer Session

Unknown Shareholder

Thank you, Mr. Chairman. Martin Glasser [ph] of Chicago. One of the benefits of attending annual shareholders meetings, especially the number that I attend, I regard these all as an educational experience. And I'm a very good listener also. And I have asked some questions on the Internet Banking. I think it's very important information that we learned today at the shareholders meeting in Discover Card. Could you put that slide back on the screen? That one. That's the one, direct banking. I have a number of questions to ask about that particular subject and I know that you will be more than pleased to -- after all, it's very important going into the future of Discover about direct banking. One of the questions I've put down, the subject is bio coin. I have to believe here at the -- since we have so many employees here...

David W. Nelms

You mean bitcoins?

Unknown Shareholder

Yes, bitcoins. You're a good listener. You picked it up. I believe that here at Discover, we have somebody monitoring the use of bitcoins and how it will affect our direct banking.

David W. Nelms

It's something we generally follow, but we -- at this time, don't see significant impact. It's a fairly niche kind of thing. It's outside the standard banking system. So I guess, I would be a little surprised if it actually -- bitcoins actually had an effect, noticeable effect on us over time.

Unknown Shareholder

And then I noticed, I was reading PayPal is an online payments company that we're associated with? And then I also read a private company, Square, a privately-held online payment. How do we measure up with Square?

David W. Nelms

Both of those companies are 2 of the partners that Discover has. And when we talk about being part of our strategy as being a leading payments partner, we partner with a number of companies. PayPal, as an example, we're going to bring their acceptance to point-of-sale and we will benefit over time with higher volume and higher demand for Discover network cards, which will help our acceptance. In the case of Square...

Unknown Shareholder

Aha! That's the one I'm talking about, Square.

David W. Nelms

Yes. In the case of Square, they are a merchant acquirer that allows people to accept payments, particularly small merchants using their iPhone or iPads or their mobile device. And they essentially provide distribution for our acceptance. We really are excited because we -- any of the Square merchant accept Discover, the brand shows up and the volume comes up. It's a really cost-effective way for small merchants to get Discover acceptance. And so they're an important partner for small merchant acceptance.

Unknown Shareholder

Could you expand on our relationship with Square?

David W. Nelms

They are a merchant acquirer, which we -- that's the way we go to -- we go directly to the largest merchants. But for the vast majority of merchants, all the small- and mid-sized merchants, we go through third-party merchant acquirers -- the same way Visa and MasterCard do. These are companies that in one way or another sign up the merchant, and then process, put in terminals at the point-of-sale and then process those payments back to credit card companies, including Discover.

Unknown Shareholder

Since Square is a privately owned company, do we have any financial interest in Square?

David W. Nelms

No.

Unknown Shareholder

No. But there's a potential someplace in the line we may read in the Tribune -- Chicago Tribune or Wall Street Journal that Discover is acquiring Square?

David W. Nelms

I think it would be unlikely.

Unknown Shareholder

Unlikely? I'm a good listener. Why did you say unlikely?

David W. Nelms

Because we're, today, not in the acquiring business and Square is an acquirer not only for Discover but also for Visa and MasterCard and American Express.

Unknown Shareholder

Thank you.

David W. Nelms

Thank you. Do we have a estimate for his earlier question on the number of employees?

Unknown Executive

As for September 13, 2012, the total [indiscernible].

David W. Nelms

Yes. So I think the question was on total employment at Discover, which has indeed increased over the last year from a bit under 12,000 to a bit over 13,000 employees across the country, including some growth here at Riverwoods. The large part of that was the acquisition of the Home Loan Center, which I think alone was probably half or more of the increase. Over 700. I think it was about 750 employees that came as a result of that acquisition. So, thank you.

Unknown Shareholder

Well, it's good to hear that some companies are increasing employment while other companies are ...

David W. Nelms

We're working to help the economy.

Unknown Shareholder

Good. Well, that's what -- that's one of the benefits of having a shareholders meeting. It gives the management the opportunity to put out some good news about the company.

David W. Nelms

Thank you. Very good. Are there any other questions at this time? Okay. Ladies and gentlemen, thank you very much for attending and for your continued support and interest in Discover Financial Services. Have a great day.

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