First Data Corporation Q2 2008 Earnings Call Transcript

First Data Corporation (FDC)

Q2 2008 Earnings Call

August 14, 2008 10:00 am ET

Executives

Silvio Tavares - Senior Vice President and Head of Investor Relations

Michael Capellas - Chairman and Chief Executive Officer

Phil Wall - Executive Vice President and Chief Financial Officer

Ed Labry - President of First Data USA

Kim Patmore - Chief Financial Officer

Analysts

Jeff Harlib - Lehman Brothers

Manish Somaiya - Citigroup

[Moss Chaudhry] - Credit Suisse

Jake Kimini - Morgan Stanley

Thomas William - JP Morgan

Peter Gingell - Angelo Gordon

[Nick Jomarsek - Vendon and Visors]

Gary Worthy - Texas Capital Bank

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Data 2008 Second Quarter Financial Results Conference Call. At this time all lines are in a listen-only mode, today’s conference is being recorded. [Operator Instructions].

Now I’d like to turn the conference over to Silvio Tavares, Senior Vice President and Head of Investor Relations. Please go ahead, sir.

Silvio Tavares - Senior Vice President and Head of Investor Relations

Thank you, Gwen. Good morning, everyone. This is Silvio Tavares, thank you for joining us. Speaking on the call today are Michael Capellas, Chairman and Chief Executive Officer; and Phil Wall, Executive Vice President and our new Chief Financial Officer. Also joining us for the question-and-answer session of the call are Ed Labry, President of First Data USA; and Kim Patmore.

Now if you will, please turn your attention to the agenda on slide 2. Michael will start by covering the financial highlights for the second quarter of 2008. Next he will discuss the numerous strategic achievements for First Data since our last call. Next, Phil Wall will present the financial performance of our three primary segments: merchant services, financial services and international. He’ll also spend some time covering the components of adjusted EBITDA and give an update on various financial metrics. The remainder of the call will be devoted to answering your questions and the operator will provide you with instructions on how to ask your questions at that time.

After the call is concluded, should you have any further questions, please don’t hesitate to contact me on 303-967-8276 or if you prefer you can send me an email at [e-mail].

Now please turn to slide number 3 for some important information about the call. Today’s call is being recorded. Our comments today include forward-looking statements and I ask that you refer to the cautionary language in our quarterly report on Form 10-Q that we filed today with the SEC, as well as the appendix of today’s slide presentation for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

During the call, we will discuss items that do not conform to generally accepted accounting principles and we reconcile those measures to GAAP measures in the appendix and on our website in the investor relations section.

All statements made by First Data officers on this call are the property of First Data and subject to copyright protection. Other than the replay, First Data has not authorized and disclaims responsibility for any recording, replay, or distribution of any transcription of this call.

So with that, I’ll now hand it over to Michael Capellas.

Michael Capellas - Chairman and Chief Executive Officer

Thank you, Silvio and good morning to everyone. Let’s begin with First Data’s second quarter 2008 financial performance as outlined on slide 5. Revenue was up 10% to $2.2 billion, adjusted EBITDA was up 7% to $653 million. Our transaction growth detailed as well and our merchant services segment, transactions grew 11%. However, the mix shifted significantly towards national discount merchants.

Credit transactions grew at 8% for the quarter versus 21% for pin debit. As a result in the second we experienced lower average revenue per transaction, which created some pressure on margins. This pressure was partially offset by the cost savings initiatives we launched in November of last year. For example, across all First Data we’ve taken actions over the last 9 months to reduce our compensation expense that have resulted in savings of approximately $64 million versus the second quarter of 2007.

Our balance sheet is in good shape, our cash and cash equivalents balance was $659 million at the end of the quarter. In addition we have ample available resources and we follow our obligations as well as invest in new products which will improve the business. We continue our investment in high growth areas such as mobile commerce, fraud prevention, analytics and loyalty. We are just beginning to see the positive results of those efforts. We will shortly be announcing some very significant customer wins in these areas.

We delivered a solid performance throughout the quarter we kept our focus on short term execution and our delivering against our five key strategic initiatives as displayed on page 6. These remain, one, generate organic growth through improved sales execution. Two, accelerate new product development in both extending our current offerings as well as entering adjacent markets such as mobile commerce, loyalty and analytics. Three, pursuing targeted geographic expansion and strategic alliances. Four, reducing structural cost as we invest in new products and finally improving our technology delivery.

In the second quarter we delivered key accomplish in each of these area, please turn to page 7. Starting with organic growth, in the second quarter we signed more than 175,000 domestic merchant locations this is an increase of 7% over the second quarter of 2007, these are additional merchant locations including signing of a major petroleum retailer. In our merchant services business we added a 11 new referral partners and 25 new independent sales organizations.

In our financial services business we signed a seven year contract with Nordstrom covering about 4.5 million card accounts on file. We will be providing card processing, call center, back office automation tools, fraud and risk management, customer analytics as well as e-statements and email alerts. These service covered Nordstrom’s entire card portfolio including Nordstrom’s visa, private label, debit cards and commercial cards for Nordstrom employees. This win reflects our ability to create value for customers with a comprehensive set of services including analytics, information services and risk management.

Next, American Express signed an agreement with us to provide live agent support and its membership rewards customers. In our prepaid segment we signed agreements to provide branded close look gift card programs for Boston market as well as a number of other known nationally recognized brands. In addition we have launched a suite of general purpose reloadable prepaid products, which will be rolling out in future quarters.

Internationally we signed Allied Bank of Pakistan to a multi year card processing agreement under the terms of that agreement First Data will host Allied Bank’s complete card portfolio on a division processing platform. In Austria we signed a contract with Smart to provide ATM driving and equipment. Smart is one of the largest retailers in Austria.

So, as the pages show despite the difficult economic environment we have been achieving significant customer wins across our business lines and in order to maintain a momentum in the future we continue to invest on focused product development initiatives, please turn to page 8. Mobile commerce continues to be an area of key interest for us, our pipeline of products is full and we have signed letters of intent with major strategic customers. Shortly we will be announcing a major trial for proprietary contact solution in the United States.

In Germany we launched a TeleCash early fraud detection system called payment security. This solution provides early warning of unauthorized manipulation from application of point sale terminals. It is also effective in preventing fraudulent means of terminals to fuel card data.

In Austria we signed first pass, first pass is an integrated bundle of merchant acquiring services for Austrian merchants which include innovative point sale, terminal equipment, a multi card merchant acceptance platform on a flat monthly fee for merchant acquiring services.

During the quarter we continued to develop the business geographically and through strategic alliances. On May 21, we announced the partnership with [Ufuser] First Data agreed to acquire 49% of Ufuser, connecting First Data and Ufuser and thus create a European payment network capable of accessing more than 74,000 ATMs, 1.5 million merchant point of sale and more than a 165 million debit and credit card accounts.

This agreement solidifies our leadership position in the European payment market at SEPA continues to open up national markets. In India we entered into a contract with Kotak Mahindra, it is one of the India’s leading financial conglomerates. Under the five year agreement First Data will provide vision plus processing for their unsecured lending portfolio supporting the launch of new credit cards and long portfolios.

In converse the prepaid company we agree to acquire in April this year, the parties have agreed to extend the completion date of transaction in order to complete certain closing conditions and to negotiate a mutually agreed upon change to the merger terms. Subject to reaching agreement with the sellers on such revised terms we would to expect to close the transaction in the second half of 2008.

With respect to chase payment effect, the wind down of that venture continues to go smoothly. We have made significant progress in allocating the merchant contracts and sales force on the basis of First Data receiving 49% of the assets and JP Morgan receiving 51%. We have also agreed to jointly provide processing and related services to each of these clients in order to execute the most orderly wind down of the joint venture. We remain on track to complete the wind down by the end of the year and we still expect the impact on our adjusted EBITDA to be neutral.

Finally, in the second quarter we focused on improving our infrastructure, please turn to page 10. We have increased our focus on improving operation performance and lower using cost for example, we have already completed actions to reduce our compensation expense as previously mentioned. As we have also commented we have a number of aggressive initiatives to improve technology delivery. These programs are all on schedule. Taken individually and collectively they will improve our quality of service, enhance our customer experience will offer faster deployment of new products over time and reduce our operating.

These programs include one, data center consolidation; we have completed the consolidation data centers in Europe and have made significant progress in the US. Two, Vision Plus. I am pleased to report that we have completed the consolidation and standardization of the product globally. All Vision Plus clients are now running on a single benchmark version; in connection with that effort we have launched an initiative to organize the business around one standard international usage platform. Three, merchant consolidation, our efforts to significantly reduce the number of merchant platforms continues to be on track and we expect completion of this major program to occur within the next 24 months.

Overall, we remain extremely focused on disciplined execution and our plan. Our achievements in the second quarter reflects that.

Now, I would like to hand it over to Phil Wall, who will take you through the financials for each of our segment. I want to take the opportunity to congratulate Phil on his new role as Chief Financial Officer of First Data. He became CFO in June of this year, he is certainly no stranger to the company, he has previously served as CFO of our international business and has an extreme amount of experience in this and so Phil your first one with us. Over to you Phil.

Phil Wall - Executive Vice President and Chief Financial Officer

Thank you, Michael. Good morning, everybody. First, I would like to say that I am looking forward to working with all of you, I am pleased as I have already been able to meet some of you in person.

So, let’s start slide 12 of the presentation to review the second quarter results of our merchant services segment. A quick notes on the presentation, the left column labeled reported shows the quarterly growth ratio and reported results for the second quarter of 2009. on the far right and highlighted in yellow, the column labeled adjusted reflects the results excluding purchase accounting adjustments related to the merger transaction.

The purchase accounting adjustments will primarily comprise this increased amortization expense. We believe the adjusted information more easily allows comparison to prior year periods.

Now looking at the results for merchant services, adjusted revenue growth was 8% year-over-year or flat excluding reimbursable debit network fees. Revenue was positively impacted by the continued signing of domestic merchant locations in the quarter as well as 11% transaction growth. This impact is offset by transaction shift towards large nationwide discounters as well as higher transaction growth of pin debits versus credits. These trends tended to lower our average revenue per transaction.

Merchants adjusted operating profit was down 2%, adjusted operating profit margin excluding reimbursable debit network fees was 36.8% compared to 37.6% for the second quarter of 2007. These declines were primarily the result of the transaction trends I just mentioned also operating profit included approximately $11 million in costs incurred for platform and data center consolidation, global labor sourcing and other expenses related to cost reduction initiatives which impacted the adjusted operating profits by 4 percentage points. These costs also impacted the adjusted operating profit margin by 2 percentage points during the quarter. Domestic merchant transactions came in at 11% for the quarter.

Now let’s turn attention to financial services. Adjusted revenue was down 2% and excluding reimbursable was down 4%. Adjusted revenue reflects growth in the debit business and the addition of new business offset by anticipated price compressions on contra renewals and by loss business in 2007. The declines in adjusted revenue were offset in part by the incremental $7 million in contract termination fees and our Star business which is primarily the results continue consolidation of financial services industry.

Adjusted operating profit was up 1%, for the quarter adjusted operating profit margin was 22.1% and adjusted operated profit margin excluding reimbursables was 29.5% compared to 28% in the second quarter 2007. Adjusted operating profit also included $10 million in costs incurred for our platform and data center consolidation, global label sourcing and other expenses related to cost reduction initiatives. These costs impacted the 1% adjusted operating profit growth by 6 percentage points and the adjusted operating profit margin by 2 percentage points.

Domestic cards account from file and domestic debit issuer transactions are up 8% and 3% respectively. Debit issuer transaction growth was negatively impacted by loss business in the Star network which occurred in 2007.

Now let’s look at our international business on slide 14. International achieved adjusted revenue growth of 19%, adjusted revenue benefited from acquisitions in prior periods and 23% transaction growth. Adjusted revenue growth on a constant currency basis excluding acquisitions in divestitures was flat in the quarter. Expansion of the business in Asia as well as the growth of the merchant business was offset by declines in our legacy card issuing business in Western Europe. Also our adjusted revenue and adjusted operating profit in the comparable period of 2007 included termination fees of approximately $9 million.

Adjusted operating profit grew 2% and adjusted operating profit margin was 7.5% compared to 8.8% in the second quarter of 2007. Adjusted operating profit included an additional loss reserve of approximately $2 million for failed airline in one of the merchant [launches] and approximately $4.5 million in incremental investments and data center consolidation, platform initiatives and other expenses related to cost reduction initiatives. The reserve on incremental cost impacted a 2% growth in adjusted operating profit by 20 percentage points.

Looking at the international key performance indicators we’ve closed the course of the transactions volume of 23% over the same period in the prior year. Point of sale locations increased by 18% and card account from file were up 13%. All three indicators were in part driven by acquisitions. There are number of highlights across the international business worth mentioning, for example in the UK we are executing the largest VisionPLUS implementation to world. In Eastern Europe, our Polish business continuous to grow steadily, in Russia, we’ve signed our first significant contract with the financing institution for issuing services. In Brazil, our payments business continues to grow and we see significant opportunities in both issuing and merchant acquiring markets.

Next I will walk you through our adjusted EBITDA results on page 15. We believe that the inclusion of supplementary adjustments to EBITDA is appropriate to provide additional information to you about certain material non-cash item, business optimization expenses and other items related to the merger transaction.

We will focus on the column labeled successive three months ended June 30, 2008. This is the column highlighted in yellow.

Starting on the top line on page 15, the loss from continuing operations was $161 million. EBITDA for the quarter was $608 million. The adjustment for stock-based compensation was $6.2 million, which reflects the reduced level of equity compensation.

The next line is an adjustment for other items of $6.5 million, which is primarily comprised of gains and losses on derivative financial instruments and non-operating foreign currency.

Let’s move to the item labeled official check and money order EBITDA. Due to our wind-down of the official check and money order business, we have excluded $16.3 million of EBITDA. As we mentioned in our last call in early January, we completed the repositioning of our investment portfolio into mostly short-term taxable securities. Therefore, we no longer have pretax equivalency adjustments.

Moving to the next line, we have $50.3 million in costs related to initiatives to optimize the business as well as reduce operating expenses. The increase level of this item reflects the heightened activity related to the initiatives which Michael mentioned earlier.

Skipping down several lines, adjusted EBITDA is $653 million, up 7% over the year. We believe this number better approximates the underlying liquidity of the business.

In addition, there are few quick points related to other businesses as well as our financial model, which I’d like to outline to you as we go forward. Please turn to page 17. A few moments ago I told you about results significant segments, I also want to spend some time on our other businesses.

In prepaid services, our revenues were up 9%, we continue to believe that the growth will accelerate as market conditions continue to restrict traditional financial services to un-banked and under-banked customers. To serve these markets we’ll be rolling out innovations in the open loop, closed loop and Money Network Payroll Card product lines.

In our all other and corporate category, we generated $15.8 million in royalty’s revenue in the second quarter of 2008, compared to $3.4 million in the second quarter of 2007. Year-to-date we’ve recognized approximately $54 million in royalties for all of 2007, we had approximately $63 million in royalties.

In the official check and money order business, our wind-down continues to be on track. Our investment portfolio balance on June 30, was $6.3 billion, which is down from $13.2 billion at the end of the second quarter 2007. Approximately $541 million of that balance was in auction rate securities. In the quarter we recorded a temporary $12.1 unrealized loss on these securities through other comprehensive income. We’ll continue to monitor and revalue these assets as market conditions require.

Then next slide is related our airline merchant acquiring customers. We systematically monitored the credit risks associated with these airlines on both individual and aggregate basis. This is in our interest that our airline customers continue to operate as long as they are adequately secured against these risks. As a result we are constantly balancing the needs of these customers for continued merchant acquiring services against our needs for reasonable levels of collateral.

Moving now to the bottom of the page, there are a few facts and figures contained in our Form 10-Q which are worth summarizing. We continue to produce significant cash flows in the quarter, however, three items affected our cash flow generated from operating activities. Portion of that first quarter interest payment of $95 million went on April the 1^st instead of March 31. In addition, pending the completion of the wind-down Chase Paymentech talk cash distributions from their lines have been deferred. Finally, income tax benefits recognized were generally not received in the quarter.

Next, with respect to our debt service obligations, our total cash obligations, our total cash interest paid in the second quarter of 2008 was $297 million. This figure excludes the $95 million interest payment I just mentioned.

We expect our cash interest for the third quarter to be approximately $435 million. The level of cash interest will be higher in the third quarter because we pay interest on that 2.2 billion high yield notes twice a year rather than every quarter. Also, we will have approximately $36 million incremental cash interest expense this year as a result of transitioning to our capped rates.

At quarter end our cash and cash equivalents balance was $655 million, our balance is somewhat higher than our requirements partly because of higher cash balances in our official check and money order business.

Our capital expenditures were $106 million for the quarter and we expect to incur an additional $300 million for the remainder of 2008. And finally, our effective tax rate of pre-tax loss was 30.2%.

Now let me hand it over to Silvio.

Silvio Tavares - Senior Vice President and Head of Investor Relations

Thank you, Phil. Now, I am going to open it up for questions, just two quick on rule, please limit your questions to one question and then one additional follow up. We do that in order to be fair to all our participants as we approach the end of our time and we will let you know when we have time for just one final question. Participating in the question and answer session are Michael Capellas, Phil Wall, Ed Labry and Kim Patmore as well as Tom Bell.

As of begin of questions, Michael will give you an update on the economic environment and a few other matters of importance. Over to you, Michael.

Michael Capellas - Chairman and Chief Executive Officer

Thanks Silvio. We will jump into questions here pretty quick. Just a couple of opening comments, generally looking forward, I mean we continue to see most of the same transits as been largely reported widely throughout the industry, first, credit really volumes continue to ship the large discounters and consumers are really trying to stretch their purchasing power. Second, debit continues to displace credit reflecting the needs of most of the consumers to deliver personally and finally we are starting to see and our international markets have shown some time their weakness as well as sort of the effects of the US move abroad. So, while we continue to really focus on our short term execution and are committed to a comprehensive product development plan, our outlook remains cautious as I think it dictates with the rest of the industry.

So, let’s take your questions and right before I do that, I just want to take one more time to specifically thank Kim for her 16 years of distinguished services we were sort of having a little debate here, contest of how many earnings call we have all collectively been on and I think Kim sort of washed the room. So, thank you Kim and we wish you all the best and now the floors are now open for questions and operator please take your way.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We will go first to Jeff Harlib with Lehman Brothers.

Jeff Harlib

Hi, good morning.

Michael D. Capellas

Hi, Jeff.

Jeff Harlib

Just on merchant services, I am wondering if you could talk about the organic growth there, your transaction growth is held up double-digit, revenue clearly is slower and looks its flat ex-debit fees, can you talk about the different factors and which are the largest factors in terms of the shift to national accounts, the debit shift from credit to debit?

Michael D. Capellas

Yeah, fair question. Let’s do very quick off the top, the reconciliation you want your head I believe, if you start backup reimbursable merchant revenue was flat, well transactions were up 10.6%. What is the reconciliation between that? And I break it into three buckets. The first one is just enormous shift from credit debit. For example, credit was up 8%, debit was up 21%. The second one is there is some a mix affected in that if you look at basically the large discounters grew at a 3:1 ratio relative to the rest of the market segments and the last one that we have inherently always had some price compression. So, a simple way to do the macro reconciliation of numbers is you have about a 2% of that, 2 point that is affected on purely the debit credit shift. The second one is you have between 3 and 5 let’s call it 4 points of normal price movement and is about 4 points of market mix which is this really, really severe shift away from the high profitable segment of mid tier markets of regional discounter. So, as we reconcile the numbers around our model the simple way to look at it is four on mix, four on price and two on debit credit shift and that sort of allows flow of the numbers. And again, those are pretty well held out as you think about the two macro affects which are debit credit shift and really unprecedented shift in the general consumer behavior to large discounters. And I think, you see them probably reflecting in just about everything you read across it. So, obviously we are tracking that pretty close and I think that’s the reconciliation you are looking for.

Jeff Harlib

Yeah, that’s helpful. And the follow up would be interest expense came down sequentially is there anything unusual or not, or is that a good run rate?

Michael D. Capellas

I will turn that over to Phil and/or Kim to answer.

Phil Wall

The interest expense is, you got to remember that we tie interest on a high yield notes only twice the year so Q1 would have had the highest payment, Q2 is low ones --

Jeff Harlib

I am sorry, I am taking about the expense not the cash, you book expense? Looks like interest expense came down about $50 million in Q1 to Q2?

Phil Wall

Yeah, that’s probably an effective interest rate actually and the last floating rate was from the debt.

Jeff Harlib

Okay, so there is nothing unusual in there?

Phil Wall

It’s nothing unusual.

Jeff Harlib

Okay, thank you.

Michael D. Capellas

Thanks Jeff.

Operator

And we will go next to Manish Somaiya with Citigroup.

Manish Somaiya

Good morning, guys. Michael, thank you for the reconciliation that you just offered, just as a quick follow up then can you give us a sense for how you to plan to offset some of the pressures that you just talked about in merchant services and perhaps if you can also give us a sense for reconciliation on the international side, which is flat in the second quarter?

Michael D. Capellas

Yeah, so let me do the same for international on the conceptual level and we will come back to you. By and large what you have is, you have two affects which are affecting the flat, obviously you have the currency affect and the acquisitions affect. So, if we look for a specific reconciliation, reported revenue was up 20%, acquisitions accounted 12% of it, currency was up 8% and organic was flat so overall, 20 broken between three components, acquisitions 12, currency 8, organic flat. Now, the organic number is a little bit deceiving so there is really a geographic spread here. So, organically we grew in the traditional what we used to call Eastern Europe obviously, Poland and Russia the extension out through the Baltic that has been an area of good growth force. We signed a number of new contracts in the Middle East particularly National Bank of Pakistan and a few others through the Middle East.

In Western Europe we still see the affects in the issuing business of some real price compression that was rolled out to 2007. So US look had a price reduction level as high as 6% or 7% reflecting some big contracts that we wrote down last year in Western Europe. We are still emerging in China and the Far East and Latin America is relatively flat. So, when we reconcile it for you very specifically up 20, acquisitions 12, currency 8, price compression in Western Europe where our largest volume is but a geographic expansion on the periphery particularly in the Balkan traditional with Eastern Europe and also the Middle East. Okay.

Manish Somaiya

Okay, fantastic. And then, just how successful do you think you will be in capturing potentially higher revenue from your other initiatives like prepaid to offset the pressures that you are facing in the three buckets are four buckets that you have talked about?

Michael D. Capellas

Well, I think you got to put two sides to this or three sides to this. First one is, the mix effect which is really unusually, I mean, I don’t sort of say this is going to last forever, the mix effect, through you have seen all of the big retailers reporting and we are going to have some consumer credit. So, while it is the business icons whether its for some quarters this is not a permanent effect, so I don’t in the permanent business model I think you can assume that this particular mix will last forever. And the mix is particularly striking to us. So that’s point one that just sort of accepted, while its difficult to see at the moment this trend shall do it. Two, we have got, we don’t have all our in one back. So, here is the areas where I think you can look for the offset. One is, we continue to think the emerging markets will pay off big force. Its not that we intend to go there, as we are there we are winning contracts those start to roll out.

Two, on the prepaid side, with or without acquisitions this is a really existing stage for us and we got to open the product, we got to close the product and there is no question as the under bank continues to be a rising part portion as the credit limitation will steep away from that traditional credit lines, prepaid will continue to rise. So, prepaid will be big force. We have got a whole product initiative around the way we programs, the analytics programs and all of those are extended revenue markets and finally mobility will really be big. So, if this 2008 effect now where we start to see contracts signed in the fourth quarter on prepaid, mobility, analytics, yes. And then, I think, this probably is the offset.

The final piece of the offset is, we are not done with cost initiatives and we have got a number of the big technology programs that haven’t kicked in yet. So, to answer your question and if a combination of the mix will adjust so let’s not underestimate or estimate to it is not the department of that. We have the new product launches, prepaid, analytics and mobility being the top three and we have geographic expansion in the fastest markets where we positioned ourselves and are signing the contracts, the best sort of the way that we think about it. And finally, we have liberty running with sales engine so I have a lot of confidence to prove this execution.

Operator

We will go next to [Moss Chaudhry] with Credit Suisse.

Moss Chaudhry

Good morning gentlemen. Thanks for taking the question. Basically my question is mainly on the cost save, it sounds like they accelerated during the quarter, could you talk about how much of it was planned versus action taken in response to any recent weakness?

Michael D. Capellas

No, I think it’s almost all planned. This is what we launched in November, we said, we would get ahead of this and I would say what was not planned so if at it these are actions we took in November. One way to think about this is our transaction volume is up 10% on about 2,500 less people we did that one and we did it early and we have continued to be relatively stable to the 10. So, those are in the plan and that’s primarily the effects of those things that we did in November rolling of. And as you know when you operate internationally some times it takes a few months for that to take effect because of the effective work of counsel et cetera. So, this was all planned, the offset to its all is it actually got the other way, we probably invested more in new product development, which is not into a little bit of that which I am still comfortable. So, there are all up, all in we probably were in the range of about 80 million up a quarter and we probably just use my estimate, my estimate is probably higher on product investment at 10 and so this was all stuff that was planned. So, you have not yet seen the effects by the way and if you recall as it necessary here as we have not yet seen the full effect of the longer term technology initiatives which we are spending on the real. Okay.

Moss Chaudhry

Okay. And just one quick follow up. I just also wanted to get your sense on transaction volume, how it has looked in July and early August?

Michael D. Capellas

We have traditionally commented on this and what I can tell you about in July transaction volume and merchant was roughly the same as it has been for the second quarter.

Moss Chaudhry

Okay, thanks.

Phil Wall

I will give you a little more specific answer it was about 10% in July and it was about 10.6% in the quarter, half a point one way or another during monthly swings. Okay.

Moss Chaudhry

Okay, thank you.

Operator

We’ll go next to Jake Kimini with Morgan Stanley.

Jake Kimini

Hi, good afternoon. I just wanted to get a little color on income, the language in the 10-Q suggest that there is some changes that are being contemplated to the merger term, can you talk a little bit about what those are, is it like a re-pricing or something going on there?

Michael D. Capellas

No, I mean there’s number of closing conditions and how these yields goes, that you have to get yet to those closing conditions and we are in private negations so as you would expect the private company, there’s no public sale available and we believe strategically this is a great move and we are continuing to have negotiations, but while those negotiations taken place there really, so I can’t comment specifically about what they are.

Jake Kimini

Okay. And then on the business front, can you talk a little bit about the pressures that you’re seeing against interlink, Visas, product and MasterCards Maestro product in the transaction part of your businesses within financial institutions, financial services?

Michael D. Capellas

Yes. I think this one I might have some at the end, but I think we -- you probably had now disposed, I will this one over to Ed just to comment on it.

Ed Labry

I think that trend continues, we’ve seen increased pressure from MasterCard and Visa MasterCard has a new platform out now, Visa had connected their [dexter] four years ago with BPS and interlinked for combined offering. So, I think that we have had some customer losses especially in the Tier 1 type banks, but have been previous disclose and we’ve talked about the stabilization of our banks and our network and actually have seen where we had a trend of negative growth we have actually stabilized that in the beginning so it’s a positive growth again. So, we also see a large number of transactions taking place in the pen base arena, so I think going forward I think that are going continuously pressures and around competition and the network business and a significant processing business, I think this with our position being one of the top significant processors number one or two in the network business that we are going to continue it too well and I think that it will turn in more to a product driven competition more so in a price driven competitions to go forward.

Operator

We will go next to Thomas William with JP Morgan.

Michael D. Capellas

Hi, Thomas how are you?

Thomas William

Good morning, thanks for taking my call. I wonder maybe Michael if you could tell us in the way that you offered us simply just what was the sort of a free protocol for First Data for having the interest rate increased on the interim loan facilities and I can see where you got the lower underwriter fees for the bonds that never were actually underwritten but is there something else that you guys got for agreeing to the higher interest rates for example, did you, as best as you can tell us, did you for example get some sort of locked rate for what could potentially be a full term loan that would replace the interim loan and refinancing or what else did you get for agreeing to the higher interest rates?

Michael D. Capellas

Probably I will expand it up that was in the middle of negotiations and Phil will describe you this one.

Phil Wall

Okay. let me just give you a little background because when the merger closed we took the bridge loans to do that within the document there were potential demands from the underwriters to change those cap rates -- to the cap rates and also just remember the intention was that the cap rate would step up anyway. So, basically we received a demand and in order to facilitate going forward and registering the debt we have started to move the interest rates up to cap. Just another to say, when of course, we effectively swapped a variable interest rate to the fixed rates as well in doing so. Okay, clear.

Thomas William

Got it, thanks.

Michael D. Capellas

Thanks, Phil.

Operator

We will go next to Peter Gingell with Angelo Gordon.

Michael D. Capellas

Yeah, Peter can I make a comment in before I take your questions. I just a while I was asked what were the transaction growth rate in July 9 to 10%, I think everybody understood that was the US. Just for the record that was US transaction growth. Okay, sorry Peter.

Peter Gingell

Hi, guys how are you? Actually the last question was disposed. The new question I have, you said that you had swapped the flowing rates to now fixed rate, can you disclose to match the public bond rate, coupon rate or is there going to be different rates on the bond on the bridge that’s going to be converted to fixed rate now?

Michael D. Capellas

Well let me just explain a little bit, the cap rate, the rates were spent off twice first on the June 9, when we executed that agreements, the amendment and again on August 19, and then will be off the cap rate. To really explain those rates actually in the 10-Q there are details, that if you need that sort of information.

Peter Gingell

Okay.

Kimberly S. Patmore

Page 14.

Michael D. Capellas

Page 14, in the Q actually outlines the specifics that you were last night accept the queue and read every page that page 2, its on page 14 but it is disclosed there. Okay.

Peter Gingell

Great, thank you.

Michael D. Capellas

It’s actually pretty clear that’s probably best way to go this is a very, very precious.

Peter Gingell

Okay. You know, just original question I had can you just review I know you have gone through this on the cost side sort of when we look confused by the responses, last quarter you mentioned that there is sort of 360 million fall of savings that you guys are not targeted I think you said last quarter you achieved 35 to 40 million of it where are you in the second quarter again I wasn’t you mentioned in the 80 million number is that just in Q2, can you just sort of reconcile where you are at that in terms of savings that are flowing through?

Michael D. Capellas

Yeah, we should can, let me give you the very specific reconciliation. So, if you start you go back to the prior it was 366 for the quarter, which you are going to see in this quarter in the reconciliation it goes from 250 so its not virtually different of a 116, 80 was in the quarter and so that leaves the difference 36, of 36, 24 is what is now being shifted over the flash back new products development and is about 15 million which is on reconcile which is basically timing on the acquisition of prepaid.

So, 366 to 250, 250 difference is 116 back of out 80 that leaves 36, 36 becomes 24 shift in the new product development and 15 is the residual on timing. Unless we do another reconciliation for you as you probably are trying to do it, the delta quarter over quarter revenue it’s 200 million back out 80 that pass through that leaves you 120 assume 30% margin fall through that gives you 40 profit contribution from incremental revenue plus 80 cost saves profit should have improved to 120 to back out the 42 it did roughly 78 and that’s sort of says its about 3% for all the variety of mix and price which sounds about right given the nature of the business. Does that help you.

Operator

Thank you. We will go next to [Nick Jomarsek with Vendon and Visors].

Nick Jomarsek

Hi, guys. I had a question on the merchant platform consolidation can you talk about what percentage of total transactions need or you are targeting to transition and what the transaction or fixed consolidation that you accomplished so far what your retention rate has been?

Michael D. Capellas

Retention rate is extremely high, because every one of these that’s why it taken 2 years to do it and there is a specific customer by customer plan. So, it’s not likely exactly go out just sort of the pull the trigger. And quite frankly on the merchant consolidation we were very little traffic so far, we had a couple of small you know, auxiliary systems that we set on our periphery the way this works is go around and take a look feeder system that which are largely not being by the customer and the trick to that is to ensure that you never sort of upset the point of sale device for the customers part of sale software implementation and so, that’s why the data center consolidation comes first, the issuing internationally comes second and merchant platform comes third, starts with the periphery around the edge of the feeder systems and then you go to the big engine on a customer by customer program, which is timed with the customer point of sales device. So, it’s not like we went out and sort of we are going to do it 90 days and there is a meeting with every major customer to walk through that so, our goal here is not to loose the single customer of this, so that’s why this is a long process.

Nick Jomarsek

But in terms of thinking about customers that are going to be impacted can you put a sort of you try to quantify what percent you guys need to contact in the transition?

Michael D. Capellas

On the transaction side, that’s a good question. And then I will follow with those terms. Ed do you want add anything on that.

Ed Labry

We are going from seven merchant platforms to two, we’ve shut down two of the smaller platforms of previous acquisitions and so really what you get left with are you know the size and scale of our two largest platforms those would be to go forward platforms. So, I think at the end of the day most of the orders impacted you’ll have – their process on the internet so you can move addresses in the internet, so, to really have no customer impact whatsoever, and you can also do emulation packages associated with the larger merchants. So, that’s about 80% in the merchants will move just on a because you are host to host say whatever so you will have that 20% of that to do emulate – emulation packages are re-powered so, I think that we’ve got a pretty good handle on the path that gets us there over the next couple of years. Yeah, I mean I think the way it agreed on that remember that by all most of those transactions are on the two big engines particularly the north platform that remain. So, it’s fascinating how many in the platform are just absolutely platforms, which are doing some future functions but not the core process. A good question, though.

Operator

We will go next to Manish Somaiya with Citigroup

Manish Somaiya

Yes, hi, thank you for the follow up, I think in the Q its mentioned that the separation of Chase Paymentech will result in tax liability of least 200 million and I wanted to find out is that something that’s going to be recovered from the Chase Paymentech venture as it separates since the (inaudible) did have a significant cash balance the last when the financials came out?

Michael D. Capellas

Yeah, I’m going to pass this call over to Kim, that has been certainly through this.

Kimberly S. Patmore

Yeah, it’s just a little too early to tell because we still are in the process of separating the merchant contracts as well as the cash balances in the settlement, and the different pieces of the alliance are being put out and they are probably will be some ruling that we’ve request as we go along so, it’s little early to tell and if some of those rulings were to happen and we’ve had some set of paces we would have some recovery as was indicated in the footnote and so, little early to tell I think we’ll know a little bit better in the fourth quarter.

Manish Somaiya

Okay. I appreciate, thank you.

Operator

We will go next to Gary Worthy with Texas Capital Bank.

Gary Worthy

Hi, this is Gary Worthy. I have a question going, we have got several bond issue can not be extended news and of course the interest rates are much higher, do you think you will have enough free cash flow and what do you think this will have in your income statement and considered all the financing display or is it too early?

Michael D. Capellas

Phil.

Phil Wall

I would say that’s too early at the moment as Michael said we’ve got the pretty strong balance sheet at the moment and adequate potential for that cash flow in the future.

Silvio Tavares

Okay, I had promised that I would come back and tell you when we have time for about one more questions. We got time for following one or two more, operator let’s go to our next question.

Operator

We will go next to Sundar Varadarajan with Deutsche Bank.

Sundar Varadarajan

Yeah, thanks. I had one housekeeping question it looks like your debt balance increased by about $120 million even excluding the accrual on the fix anything going on there and you expect that to come down over than a back half?

Michael D. Capellas

Kim will take that one as well.

Kimberly S. Patmore

We had a dry down of about 130 on our revolver and that 130 on the revolver is really just because of the way that month ended on a Monday, and on a Monday we have this settlement before the weekend that we actually get reimbursed at the end of the day around Tuesday and so which is the temporary dry down between which we paid back immediately.

Sundar Varadarajan

Okay. Just more on the business side, it seems like you’ve been across all the business organic growth is clearly slowing down, every business is kind of flat maybe, slightly down on the financial services side and given the current microenvironment do you think if bottomed out or do you think this probably you’re going to continue to see pressure from the year-over-year growth perspective and also if I might ask on the merchant services side, could you give us a sense for what the margin differential is between the debit card transaction versus credit card so that it’s kind of help us frame from a modeling perspective as we see that mix increased in the near term or how would it impact margins?

Michael D. Capellas

On the macroeconomic side I mean, the question where it’s about doubt and a year-on-year comparison. I think the best way to look at this is that you had three of certainly the most -- the largest about implemental retailers, it’s about 1 to 3% transaction growth gone through the summer and when we went for the August, so the tough year on your comparison so we got to get up obviously the back call which – if you got to look at with the big shift sort big discounters, three of largest and (inaudible) 1.1% to 3% shift pretty muted back to school. We helpfully pick up by is on year to year that we are talking and then we try to project the other big kick on the year-to-year comparison on the holiday season. We read all the same stuff that you read and right now or all we have to provide (inaudible) one so, again what I can tell you through the summer it’s look like trends continue in the back group or certainly the affected that’s the big retailers which occurred in the transactions most talked about and pretty well growth rate. I mean that’s we break ourselves onto summer.

Relative to the organic growth rate we are well positioned across obviously a great balance, so if you look at our position on the national retailers or small retailers, quick service restaurants truly I mean so, our balance sort of mean just because we are across such a wide flash we’re going to move generally with the movement so I mean we, the good news is that we are crossed such wide flash we have managed a sort of relatively given the general macro economy effect actually hung and that pretty well and I think so the year-on-year tough comparisons are going to be back to school on a holiday season and how much that business and relative to prior year conclusion based on the economy so and so.

We’re anticipating same trend through the next quarter and the only other thing I’d add is that we are stuck a little bit of deterioration must -- very open so, I don’t know that was clear but I think all of that trying to struggle to decrease the volume and we’re on bottom and (inaudible) what the big retailers said just we tried it out.

Silvio Tavares

Okay, operator we got time for one more last question.

Operator

We will take our last question from Jake Kimini with Morgan Stanley.

Jake Kimini

Hi, just on the dividends that the company gets from payment sector they won’t made in the second quarter and it looks like they’re not going to made in the third quarter so when the lines is off, how much cash is going to come the company’s way upon the end of the JV.

Kimberly S. Patmore

No. On that one it’s just that’s a little early to tell because the little bit of a cash distribution is going to be also be based on which merchants we take because there’s some collateral on the settlement and the cash assets and so I think when you think about those together and how they’re going to be divided, it’s really going to depend on how the merchants are actually divided out there and also a bit of disappointed for not taking our distributions and so we would anticipate we get our distributions at that point of time plus some portions of the cash depending upon how that merchant actually put up.

Jake Kimini

How much cash is on the balance sheet today of the JV?

Kimberly S. Patmore

What was in the cash on their annual financial statements was over a billion dollars, but again some that cash could be tied up relative to the merchants.

Jake Kimini

Okay. So, like what percentage of that billing do you think is actually available to be distributed amongst you and JP Morgan?

Kimberly S. Patmore

It’s just too early to tell because we are working through that with the folks that keep all of the records relative to the cash and the settlement assets and so at the end of the day theoretically as we move along you could assume that we get about for 49:51 split, but it’s really going to depend upon what the cash needs are relative to the merchant collateral.

Michael D. Capellas

I want to conclude our question and answer and one more time I’d thank you for your questions and participation in the call and we will talk to you again at the end of the next quarter. Thanks a lot. Silvio will be available to take detailed questions for the remainder of the day.

Operator

Thank you, everyone that does conclude today’s conference. You may now disconnect.

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