MasterCard's (MA) Management Presents at William Blair Growth Stock Conference (Transcript)

| About: MasterCard Incorporated (MA)

MasterCard Incorporated (NYSE:MA)

William Blair Growth Stock Conference

June 15, 2016 10:20 am ET

Executives

Martina Hund-Mejean - CFO

Analysts

Bob Napoli - William Blair

Bob Napoli

Are we ready? Okay. Great. Thank you. My name is Bob Napoli, I cover the financial technology space for William Blair. For a complete list of disclosures please go to - and potential conflict of interest go to www.williamblair.com. We are very excited to have with us today, MasterCard, so, we have MasterCard, CFO, Martina Hund-Mejean. We also have with us -- I practiced. We also have Barbara Gasper, the Head of Investor Relations. We're going to do a fireside chat format this morning. We're lucky that Martina made it in with all the weather problems that we have here in Chicago.

Martina, I was hoping that maybe initially you could give us an update on current business trends.

Martina Hund-Mejean

Okay. Yes. So usually, we do that on our earnings releases that we kind of talk about the week after we close the quarter. And so, we have numbers out there by the end of April, and then, I think just a couple of weeks ago, I refreshed those numbers for year-to-date to May 21, so you kind of get to see kind of six, seven weeks of the quarter. And what the three drivers that we typically focus on is first of all process volume; the process volume that we see worldwide and by the end of April, we had about 10% growth number, by the end of -- by May 21, we have about 9% growth number for that. So what you see is basically that the USA roll off is starting to come in and we have mentioned that already on our earnings release.

The second driver that we looked at is our cross-border volume growth and cross-border volume growth is very, very similar to what we had before, 11% or so. And then, we have process transactions, which is also really good indicator in terms of what people are obviously doing across the world and that has been the same number as what we saw in April at around 14%.

So, really from a story point of view and from what we're seeing from an economic environment point of view not too different than what we saw in the first month of the quarter which is April.

Bob Napoli

I mean, there is obviously a lot of concerns about where we are in the economic cycle. And so based on what you are seeing, you are not really seeing any downward shift or where are you concerned where you're seeing good trends…

Martina Hund-Mejean

Yes. I mean look, it's really not different than what we said on our earnings call. I mean obviously, growth everywhere in the world is not super high, right? I mean there is kind of bouncing around the bottom that's what we have factored in. We don't really see any market change now. I do have to say in the U.K., you'll see a little bit of the shift. It doesn't really impact our overall numbers. But you do see that people are more impacted in terms of figuring out what is going to happen, the pounds sterling obviously depreciating that could have some impact at some point in time, but other than that the trends really haven't changed.

Bob Napoli

What are your thoughts on Brexit? I mean how do you plan for it? What -- I mean, obviously, it would take a long time I think to implement or the exit but…

Martina Hund-Mejean

So, first of all, from an operations point of view there is really no issue for us, right. I mean our network has been set up for 210 countries and territories and we have to be respecting the laws and the regulations at every country. And I don't believe that the U.K. will be immediately changing their laws and regulations. In fact, I would presume, this is a presumption, that PSR will be continuing to adapt what the EU regulation was in the payment industry that have been passed last year.

From an economic point of view though I do believe that there will be an impact. I don't know if it's just going to be short-term or long-term. But from a short-term point of view we definitely believe that there will be some impact on economy and what people are doing and how they're traveling, probably there could be some impact to the pound/sterling at least in the short-term. And then, over the long-term it depends on what the U.K. is actually doing with the remaining European countries in terms of contracts and trade agreements et cetera that they would be negotiating. Other than that it's really kind of business as usual, right? I mean sterling is already by -- it's really no different, it's -- to watch out on the economic environment and what could happen there.

Bob Napoli

Now your biggest competitor obviously is acquiring [indiscernible] with the European theme acquiring Visa Europe that deal will be closed pretty…

Martina Hund-Mejean

They are booming.

Bob Napoli

Pretty, pretty, shortly. And what if the -- obviously, you're taking a competitor that was not for profit making, then for-profit -- what are your -- I think historically you have said that Europe has been a lower margin business for you. I think pricing is clearly lower, what are your thoughts on the benefits to MasterCard or challenges having a not-for-profit competitor become for-profit?

Martina Hund-Mejean

First of all, we think actually that this is a very, very good thing that Visa Inc., is buying Visa Europe. We believe that we will have a rational competitor compared to what we saw before in the market as well as when we have to have discussions with the EU about regulations. I think overall it's actually very good for the market. It would take them some time to integrate it, but they are a great house. I'm sure they're going to be able to do that in a very good manner.

In terms of our business in Europe, it is lower yielding business not necessarily a lower margin business, right. But the yield in Europe is typically lower than in the rest of the world and it's really because the type of products that you have in these countries and the type of competitors that you have many European countries still have domestic schemes as well as processing entities, so we are obviously competing against those. And even when you look at the cross-border rates within the EU so the network -- our network rate that we are charging, there are two things typically; one, if you're within the euro zone you’re typically been transacting in euro, so you don't get the effect, exchange margin on that.

And secondly, cross-border network fees are lower intra-Europe anyhow versus between continents right. So, in terms from a competition point of view, we do know that over the last few years Visa has been holding quite a few of the agreements with the bank just because of the pay out that Visa -- transaction would be presenting to the bank so they really couldn't move much of the volume, right.

So, while we did win market share, we won a lot of market share against domestic schemes. And I do believe that hopefully over time there will be more opportunity for us to be talking to more banks in terms of showing them what MasterCard can do from a products and a service point of view and there might be some opportunity.

Now having said that, our prices are higher than Visa Europe's prices already as we know that and [indiscernible] winning market share despite that. So I think it will see -- we will see how that works out. But, when you know Javier Perez, who is our European President, he has been talking about this opportunity for the last two or three years and I don't think we see any change in terms of that there will be opportunity for us down the road.

Bob Napoli

Okay. Now, I think one of the concerns that investors have is that I mean in this market, I think there is, you have Costco which is very a competitive transaction, I mean your loss of the USA transaction…

Martina Hund-Mejean

You're talking about the U.S. now?

Bob Napoli

Yes. I'm talking about -- well, U.S. and even globally, is there the -- your largest competitor are they more aggressive than they were in the past, are there signs of additional pricing pressure in the industry?

Martina Hund-Mejean

Look, first of all, you have to understand that the payment industry is particular for the network that doesn't matter which network you're talking about. This has been always a very competitive space. So, we -- the price is always really important to anyone of our clients, yes you have to have really good products, but price is very important. So from that point of view, I don't think we are seeing much change, I do believe that the co-brand space in the United States got more competitive quite frankly. You saw that with the Costco deal. We try to do it as much as we could, but in the end we did not win that piece of business and it got very, very competitive on that side.

Having said that, that is last year and in the meantime, we have been doing a number of deals and business and I think the pricing environment is pretty much still what we had before that. So -- but, again, I don't want have anybody mistake this. This is a competitive market.

Bob Napoli

Maybe you could talk about renewal -- the pipeline of renewals and historically, whenever you've lost a customer, you seem to win one somewhere else?

Martina Hund-Mejean

Yes. I mean just to put it back, I have been in this business for 8.5 years now. And it's amazing to me because really what we are focusing on is on the 85% of cash and checks that are not yet electronic and trying to convert that which is a secular trend. Other questions that you are asking me is really in that 15% that is already -- 15% of retail transactions that is already electronified.

And what you have seen over the years is, you have seen we have win a few, Visa wins a few, Amex is sometimes in the mix, and then, there is number of other players that could be in the mix and things can kind of go back and forth. I would have to say worldwide over the last few years we have been, worldwide, we have been winning market share. But, it's not just, again, Visa, their loss of domestic share -- domestic schemes against you can win actually market share, and the only area that stood steady for us from a share point of view, slight decline now with the USAA deal rolling off, is in consumer credit in the United States, okay? But, when you look at debit and when you look at commercial, we have been winning share in the United States on that on too.

Bob Napoli

As far as domestic schemes, couple of years ago when Russia Crimea, Ukraine global sanctions, Russia found out that we would shut down their payment system when --

Martina Hund-Mejean

Not a good thing.

Bob Napoli

And so that led Russia to build their own domestic network, is that a concern, nationalism, people concerned that --

Martina Hund-Mejean

I mean absolutely Bob. I mean, as a U.S.-based company and I would say some European-based companies have a checklist and issue because the EU does also pass sanctions, right? But, as a U.S.-based company, obviously, we are complying with law here in the United States and we have to comply with law by the way in all of the 210 countries and territories where we do our business. So, this was a really, really tough time and the sanctions against Russia came in. And nobody foresaw that by the virtue of putting a few names on the list that we had to be impacting and shutting off service to a number of the Russian banks relatively small banks. But, of course, that went like wild fire not only around Russia, but around many other countries where the U.S. might not have a too collegial kind of relationship. So, what we have to do is, we really have to make sure, one, that we do educate Washington, but of course, from a political point of view these guys have to do what they have to do and we have to comply. But, we have to educate them on that.

And then, secondly, we had to make sure that we work with the Russians in particular to make sure that their national payment system is up and running under any circumstances, any circumstances, so that a foreign country really cannot impact that. And I have to tell you, I mean, we were -- it was very difficult at the beginning, but I think we struck some extremely good relationship with the Central Bank of Russia. And we are able to put something together that one really address the issue, okay, So, from a processing point of view local domestic payments are processed, we help them build that engine and that processing platform, we help them to get it up and running, lots and lots of work. But, at the same time, the Russians allowed us to keep our business and you really didn't see any impact from a revenue point of view, it did get more costly, all right, because you obviously now have to pay a fee, a processing fee, to [indiscernible] which is the domestic process.

Now, I have to tell you, this just taught us a really good lesson, we have been already on the path of figuring out how do we modularize our platform out of St. Louis. For countries that have, certain different views in terms of how they wanted to do payments, in terms of, they wanted to have maybe the processing engine located on soil, they might not want to have the data leave the country. So a number of facets that you see in a number of countries that passing those kind of regulation. And so we have been on the path to modularize already our platform and we have because of the distributed way that we do our platform we already have local stuff in the country typically. So but that just gave us an impetus to be really looking at the five different ways or so that we can put our platform together to make sure that we keep as much operating scalability as we can, but, that we do serve both countries that might have a little bit of a different view in terms of how they want to have put together. And if you can see those tendencies in countries such as what's going on in Indonesia and Malaysia, of course, in China, all right, that's a big one. And I think we are prepared to be able to address that in the right way.

Bob Napoli

Cross-border is obviously a big part of your business and a very profitable part of your business. And I think in some markets you have seen a slowdown especially in China on cross-border. Now, as far as cross-border goes, are you losing market share to China UnionPay or is volume being -- or do you think it's -- it doesn't seem like the slowdown that you and Visa are talking about out of China, doesn't seem to quite correspond with the actual travel trends, if you look at Ctrip out of China?

Martina Hund-Mejean

First of all, from a worldwide comment point of view, right, I mean double-digit cross-border growth and you can look at some of our competitor -- some numbers that are public out there. And not a lot of numbers out there, I doubt, we are losing market share. But, I cannot tell you in the context of China what really the facts are because I have no idea what China UnionPay's volume is from a cross-border point of view, they don't put it out like us and other publicly traded companies do. So that is a little bit of a tough one. We do know that we think from correlating some data that there has been a slowdown, so we are still growing by the way in China, okay, but that there has been a slowdown in cross-border spend by the Chinese in part of course of what's going on in the economic environment, but also what's going on in terms of how the country has been starting to control certain things on expenditures et cetera really from the top down, right?

So, we are seeing some very careful behavior, you are not going to have a lot of Chinese anymore going to Hong Kong and buying ten Louis Vuitton bags, okay, that's just not happening at this point in time. In fact, I was just in Hong Kong, when you walk around the streets, you just don't see that anymore which is a stark difference to what you saw a few years ago, right.

So, I think you can explain some of that, but for me it's a tough time to tell you really the fact versus China UnionPay.

Bob Napoli

Sticking with China, I mean, the China market openings and rules came out last week, I guess initial rules and I think American Express yesterday said that China is going to be the largest payment market in world in a few years. What are your thoughts around MasterCard participation in that market in a major way?

Martina Hund-Mejean

So, first of all, I don't doubt that China will be the largest payment market in the world. I mean but there is one point what 4 billion Chinese or something -- 6 billion Chinese and with the way that their GDP growth has been behaving which is coming close and closer to the United States and overtaking some point in time. I don't doubt that, right? It will be a very, very important country. It will be very important for the international networks to be getting into that country.

Now, having said that, even before the final regulations came out last Tuesday, I think, I have been saying to everyone of our investors and at these kind of conferences, you again have to take this, was a little bit of grain of salt. First of all, there is a lot investments that we have to do. Secondly, there is a lot of work that has to be done in order for us to be connecting to the typical Chinese, most of the Chinese have -- one actually more than one two or three club cards, China UnionPay cards and many of them don't even know what MasterCard or Visa is, right? So, there is a lot of work from an infrastructure, from a marketing point of view, from an acceptance point of view that has to be done.

When you look at many other industries that have entered China over the last 20, 30 years and I know some of those industries pretty well. Typically, you don’t make money before at least five years, most people don't make money for 10 years and some don't make money for 15 years. So, you're going to have to have a really long view that's why I did not bake them into our three year guidance that we talked about last year. And I would be -- hopefully, I would be surprised a little bit on the upside, but, I don't see it -- I don't really see that necessarily happening.

Now, the regulations have come out last Tuesday, I think make it a little bit tougher to be getting into the country because they have introduced and this is one of the big changes in national security review. And I have to tell you the lawyers are still telling me what -- trying to tell me, trying to actually figure out themselves what that really means, a national security review. There are no timelines around the national security review, so it could drag you forever. And by the way, you can't even submit your application to the PBOC for the license until you are through the national security review.

So the bar has just gone up in terms of getting into that country, so kind of have to get through that. And then, you are going to have to do everything that we talked about before in terms of getting the license.

Bob Napoli

Okay. PayPal is the -- obviously, a partner, significant partner and as well as competitor and lots of discussion some very direct comments from your largest competitor regarding PayPal. The changes that the enrollment has made at PayPal, is he going fair enough?

Martina Hund-Mejean

Look, I mean we have two big issues with PayPal, right? One is data, so when you do a stage watered transaction and that's what most PayPal transactions are, where you basically take your MasterCard, you fund the PayPal wallet and then you pay the merchant; the merchant doesn't really see that this is a MasterCard transaction. And by the way, we don't get to see what kind of data we normally see especially from a faux perspective and where that transaction has been done. And I think the time to address some of that, and I don't think it goes far enough from what I hear from our people. But, that is certainly one big concern that's why we put in also the [indiscernible] because obviously from a faux point of view and what can happen to the issue on this kind of transaction. That is a much more difficult thing.

The second issue is of course ACH theory, we don't like ACH theory, right? I mean, it's clear, we want consumer choice. We want the consumer to be deciding what they want to do. Do they really want to link their checking account? And do they want to link any of their card product? And I don't know, if there -- if you are going to see a real sea change, we are hearing some good works coming out. So hopefully there is something that we could do together more in-depth with the company. But, I think I don't know yet.

Bob Napoli

Okay. As far as just trip card EMV technology switch here hear then and then you have a great global view, the U.S., we've just gone to the chip cards that seem to be a bit stagy in other markets, you are using the interface face cards. What is the -- what do you think the outlook is -- the merchants aren't happy with chip cards many of them are -- where does the U.S. market go over the next few years?

Martina Hund-Mejean

I mean, first of all, very interesting, right? Because this trip card doesn't just enter the market from today to tomorrow, in fact, we have been talking between the banks and the merchants and we have a whole group on that -- ever so often over the last -- over four years -- over four years. So the market last October that was over -- it must have been almost five years at that point in time. That everything was actually talked together, okay, in terms of how do you implement EMV, what come first, second, all the conversations on chip and pin, chip and signatures et cetera, et cetera. And that was actually a common discussion. This was -- banks were in the room, the merchants were in the room, we were in the room, we left that, again, so this was a MasterCard endeavor.

In order to make sure that we have all of the constituencies in the payment system aligned and understood what goes forward. And then, suddenly, now we are implementing, October 1 liability shift day that was coming in last year that didn't come out of nowhere, okay? This has been out for years quite frankly. And it has been out for years for good reasons because we wanted to make sure that the participants prepare themselves when the shift is coming in. That means on the issuer side, obviously, the issuers had to prepare themselves for making some decisions on what kind of chip cards actually wanted to issue.

And for the merchants, they needed to make sure that the terminal is chip enabled and certified, right? So it's a little bit of -- really, we've been working on this 4.5, 5 years, you were all in here and now certainly we have this stuff coming up. So that's a little bit surprising quite frankly. But the one issue that we are trying to address; while, there are two issues really we're trying to address, one is when you dip your card it looks to you if the transaction takes longer to complete, but it's actually not true, okay? It's the same time as a max type transaction, but remember when you swipe the card then you're busy actually putting the card back into your wallet. So you're not thinking about all the transaction happening but if you keep your chip card in there then obviously you're still like -- can I pull this chip card out, right? So, we are all having a little ADD on this one, I know.

So it looks to most consumers and I think we should have thought about that a little bit more and we have in other markets you adapt, you make some upgrades and make some changes and we've been at this so many years as you said in many other markets. So there will be the upgrades coming in. In the meantime, we put out and the competition put out the track and chip or whatever we call it, which allows you to dip the card and pull it out. The second step of the transaction only gets completed afterwards it's a little bit of a different way of how we move the transaction around so that will help for those merchants who want to adopt that, right? But it’s a journey and we have in many other countries, but it was a journey quite frankly that was laid out very clearly to all constituencies over years in this country. So I would be -- I don’t think anybody should be really surprised of where we are.

Bob Napoli

Is U.S. market going to get into interface cards?

Martina Hund-Mejean

Dual interface cards?

Bob Napoli

The contact with cards?

Martina Hund-Mejean

Every, every -- so every terminal actually that is being shipped already for a while has contact list for NSC capability, the merchant has to turn it on in order to have you use it. And quite frankly those banks that did put out chip cards with the NSC capability is a very easy thing -- I mean you do not wait for your transaction, you don't dip, okay, you do tap and go and off you go, its really great and I wish we would have more -- many more of those cards out there and hopefully with the next cycle we'll see more of those.

Bob Napoli

Acquisitions I mean MasterCard has made a reasonable amount of acquisitions -- and you're also rumored to be in exclusive negotiations with Vocalink, I guess in Europe, what are your -- can, obviously you won't comment on that. But could you just overall, the acquisition strategy, are you guys looking back over the last couple of years and how does it perform, so are you happy with that and what is your future M&A strategy from here?

Martina Hund-Mejean

Yes. So just for the whole audience, in terms of the acquisitions we are focusing on very defined areas right, one area is processing and that is not switching, off-clear and settlement we do obviously best. But, in many countries we cannot do off-clear and settlement either because of the country regulations or because there is a monopoly in the place, and then, we like to see the transaction in a different way which we call processing what that really is, is issue on acquiring processing or any type of other network kind of processing that we could be doing. So processing is a big theme for us and why are we interested in that? It's not necessarily that we make a lot of money on this processing stuff, you actually don't, okay? Those are pretty low yield and low margin kind of transactions. But when we see the transaction; we can actually add to our services, we can actually do a lot of data analytics; we can add to our advisor services; we can add to our faux services et cetera, so that's why we are really after those kind of transactions. So that's one big area in terms of where, we're always looking at properties around the world because there are actually quite a few counties where we don't process. I mean we process what we switch, we switch about five out of 10 MasterCard transactions, okay? So of course, we would like to get that up.

Second area that we're looking always at is, in our information services business that's where we did a big acquisition last year the APT acquisition, which actually is working really nicely. We're very happy to say that, but, of course, we see a lot of data. The data is -- it's not your personal data just to let you know if that's your bank data, I don't see that. I just see how you transact on your card and then what we do is we anonymize that and then we aggregate the data and quite frankly that is a lot of work that we can do for our clients, banks and the merchants in terms of helping them optimize the portfolio. So information services is really important.

The next area for us is really loyalty and the other area for us is [faux] [ph]. So you might have seen in some of our numbers, our faux products are starting to really take-off. There is not a lot of acquisition and there you have a couple of minority investments. But organically we have been doing a lot of things putting our assets together that became really interesting proportions. But, again, I'm going to say to you, if you find something in this arena that would be good and then that would be great.

And then, I have all encompassing bucket of technology, okay? And that might be anything that doesn't fit really in the other bucket. But, we are in the out to the company to make sure that we are absolutely on the forefront of what's happening from a technological environment and that's why we make investments there too.

Bob Napoli

All right. I believe we are out of time. We have a break. We will be moving to the break out room and let's all be downstairs. Thank you. Thank you.

Martina Hund-Mejean

Thank you, Bob.

Bob Napoli

Well done, Martina.

Question-and-Answer Session

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