Global Payments Inc.
Q2 2010 Earnings Call Transcript

Published: 8 Jan 2010

[Operator:]

Welcome to the Global Payments second quarter fiscal 2010 earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to your host, Vice President of Investor Relations, Jane Elliott.

[Jane Elliott:]

Good afternoon and welcome to Global Payments fiscal 2010 second quarter conference call. Our call today is scheduled for one hour and joining in the call are Paul Garcia, Chairman and CEO, Jim Kelly, President and COO and David Mangum, Exec. VP and CFO. Before we begin I’d like to remind you that some of the comments made by management during the conference call contain forward-looking statements that are subject to risks and uncertainties that could cause actual result to vary which are discussed in our public releases including our most recent 10-K. We caution you not to place undue reliance on forward-looking statements. Forward-looking statements made during this call speak only as of the date of this call and in addition, some of the comments made on this call may refer to certain measures for full year fiscal 2009 which are not in accordance with GAAP. Management believes that these results more clearly reflect comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance to Regulation G, please see our press releases filed as an exhibit to our Form 8-K dated January 7, 2010 which may be located under the investor relations area on our website at www.globalpaymentsinc.com. Now I’d like to introduce Paul Garcia.

[Paul Garcia:]

Happy New Year everyone. Thank you for joining us this afternoon. For our fiscal 2010 second quarter we delivered solid financial performance with revenue growth of 12% to $409 million and diluted earnings per share from continuing operations of $.71 or 25% growth compared to last year. These results exclude our Money Transfer segment which we have classified as a discontinued operation. David will provide more detail on this in just a moment. We did get a lift from currency translation in the quarter; therefore from a constant currency perspective, second quarter revenue and EPS growth would be 11% and 20% respectively. Our North American Merchant Services revenue grew 10% for the quarter driven by a strong performance from our ISO channel as evidenced by U.S. transaction growth of 19%. Average ticket amounts were flat sequentially and down 9% from last year. This is actually encouraging, but it’s too early to determine whether this portends for a positive trend. Our Canadian business continues to be affected by overall macro economic conditions driving large national merchants to heavily discount merchandise and thus taking larger proportional share of transactions away from the small and mid size merchants that provide higher revenue and margins to us. This overall mix shift was partially offset in the quarter by a favorable Canadian currency exchange rate. International Merchant Services delivered revenue growth of 15% driven in part by excellent performance by United Card Services in Russia. Our U.K. business continues to execute well despite a macro environment and an unfavorable currency exchange rate compared to last year. Our Asia Pacific business grew 7% for the quarter and continues to take market share and gain scale. Though still experiencing softness due to the macro economic environment, we continue to anticipate full year revenue growth in the mid teens from that region. Finally, I am pleased to report that we are making solid progress towards closing the divestiture of our Money Transfer business and we hope the deal can be finalized in the March/April time frame. Now, here’s David to discuss the financial details.

[David Mangum:]

Thanks Paul. I’ll review currency trends, operating margins, balance sheet, cash flow and financial statement presentations. During the second quarter the dollar weakened against the Canadian dollar but actually strengthened against the British Pound and although our revenue and earnings expectations allow for some additional weakening at the margin, it would not surprise us to see the U.S. dollar strengthen a bit from current levels. We believe our expectations accommodate this possible range of outcomes, but any fluctuations in currency rates, of course may cause variances to our outlook. From a constant currency perspective, the overall weakened U.S. dollar added about $4.5 million of revenue or 1% of growth and $0.03 per share or 5% of growth to our second quarter results. Total company operating margins from continuing operations for the second quarter were about what we expected at 21.7%, up from 21.3% last year. On a year over year basis, North America margins were affected by the difficult Canadian revenue mix Paul discussed earlier, partially offset by currency exchange rate benefits. International Merchant Services margins benefited from continued solid performance in the United Kingdom and Asia Pacific. In Asia, we expect revenue growth to return to the mid teens in the third quarter. We continue to see the opportunity for modestly expanding total company margins for the full year, but the revenue mix situation in Canada may make this more challenging to achieve. We reported an effective tax rate for the quarter of 29% due to some international tax initiatives that bore fruit during the quarter. We now expect our full year fiscal 2010 effective tax rate to fall between 31% and 32%. Our share count for the second quarter was up to 82.2 million due to recent performance in our share price. For modeling purposes, we suggest you assume about 83 million shares for each of the third and fourth quarters for full year average share count of about 82.5 million. This will likely have a negative effect on 2010 earnings per share of about $0.01 compared to previous assumptions. Similar to last quarter, we have total cash and cash equivalents of about $1 billion due to the quarter ending on a Monday. In fact, our total available cash at the end of the quarter was a little over $200 million. Now relative to cash earnings, amortization expense for continued operations after non controlling interest for the second quarter totaled $7.2 million and we expect about $29 million in total for the full year. Please note that amortization will fluctuate over the course of the year due to currency translation. In the discontinued operations presentation, you will see some one time charges and tax benefits associated with the divestiture and we expect to record some modest additional charges when we close the transaction. This quarter, we recorded non cash pre tax divestiture related charges of $15.9 million offset by tax benefits of $18.8 million. The combination actually increased our diluted earnings per share from discontinued operations by over $0.03 this quarter. Please note that these divestiture charges were not included in our earning expectation for Money Transfer for fiscal 2010. Our full year outlook for diluted earnings per share from discontinued operations for Money Transfer included about $0.12 from Money Transfer. For the second quarter, excluding these divestiture related items, diluted earnings per share from Money Transfer would have been about $0.025. Now I’ll turn the call back over to Paul

[Paul Garcia:]

Thanks David. Based on our current outlook for continuing operations, we expect 2010 annual revenue of $1,580 million to $1,615 million or 8% to 10% growth over fiscal 2009. Also, we are increasing our fiscal 2010 diluted EPS expectations to $2.35 to $2.46 reflecting 12% to 17% growth over fiscal 2009. Before we go to questions, I’d like to address the 8-K filed earlier this week that updated my employment agreement. This agreement commits me to a minimum of three and a half additional years and reflects the Board’s appreciation for our performance. I look forward to executing upon the many opportunities we have at Global Payments to expand our global presence and market reach, and I feel confident that we will deliver on these opportunities. I am excited about the future. Operator, we will now go to questions.

[Operator:]

(Operator Instructions) Your first question comes from Bryan Keane – Credit Suisse.

[Bryan Keane:]

I just wanted to ask about the guidance. Obviously the first half of the year looks pretty strong and in order to back into your guidance, there would have to be some deterioration in the growth rate in both revenue and some of the profits. So maybe you can help us with that David, to walk us through why there would be some sequential pressure on revenue especially when you’re going to get more currency benefit I think going into the second half.

[David Mangum:]

I’d be happy to give you some color. I think the end of your question really starts off the right place to talk about how we see the next couple of quarters shaping. It really does start at a macro level, then maybe I’ll touch on the businesses themselves. If you think about where we are year to date, Q1 as you know, we were about where we expected to be in terms of our EPS plan, maybe a little bit better tax rate than we thought. In Q2, a little more of the same, a little bit better tax rate, some discrete help from an item in Canada, a little help from FX in Canada specifically that helped offset some of the revenue challenges we’re seeing right now in Canada. So thus as we sit here today, we’re a little ahead on EPS, but it’s primarily due to lower tax rate and better currency results. The results of the business operations really are about what we expected. So then if you turn now to Q3 and Q4, we aren’t yet seeing any of the global improvements in volume and transactions that I know we’d all like to see, so we’re certainly still cautious on the macro economic environment. That’s one factor. Also, just to mention, we have some real macro driven challenges in Canada which as you know is a major contributor to our margins and our bottom line. So if you then turn to FX, you asked a great question about what’s going to happen to the dollar. Obviously we don’t have any clue relatively speaking in terms of analytics or forecasting ability, but we have certainly have seen the U.S. dollar actually strengthen recently, and we really don’t expect a whole lot more sequential weakening of the dollar in Q3 and Q4. Let me give you a couple of examples of that. As we exit December, the dollar is literally stronger now against the Pound than it was in Q2, also a little stronger against the Euro, and just a hair weaker against the Canadian dollar when you compare it to the second quarter levels. So if you look at our range, we allow still for some more sequential weakening of the dollar in our expectations. The bottom end of the range obviously allows for more sequential strengthening but we really don’t see an awful lot more weakening of the dollar to come. We allow for some, but not an awful lot more. So to summarize sort of at that level, on a sequential basis, we don’t see a whole lot of tail wind coming from FX or massive improvement in volumes of transactions that would help offset some of the seasonal weakness we expect to see from the global business. So let’s touch on the businesses now for just a second. Without the help from the tail winds, what I think we’re starting to see is as we expand globally, a bit more of a stronger pattern of seasonality for the quarterly flow frankly for both revenue and earnings but more specifically earnings due to the fact that we’re starting to see similar patterns for income in almost all of our geographies. So you’re used to seeing a seasonally weak third quarter from the U.S. and Canada in our results. But we actually see a similar Q3 pattern in our next largest market, the U.K. In fact even in Russia, our third quarter looks very light compared to the second quarter, much lighter than the second quarter. So with the exception of some of our markets in Asia, each market we serve steps down pretty substantially in Q3 from Q2, and then comes back a bit in Q4 as you’ve seen in the past, but certainly not to Q2 levels. The other thing that’s kind of going on, just to add a little more color at the end of the day, you get some artificial increases to the perceived seasonality which is the timing of some of our POS terminal sales in Europe; even the timing of some of the networking center for revenue, you guys know we get from time to time in the other markets. Some relatively highly profitable sales actually happen in Q2 and we actually thought they’d come in Q3. It just sort of exacerbates the seasonality. Maybe part of the trick for solving for your model based on the way you phrased your questions. And then finally, North America, remember the U.S. has a few less processing days in Q3 than Q2 this year. It’s different from last year and previous years, and of course the macro challenges in Canada. So if you talk about it in margin terms, you can take a look at history. Our general pattern is to post our highest operating margin in the first quarter, a bit lower in the second and then lower margins again in Q3 and Q4. At a high level, I think it looks like 2010 is kind of following that pattern, but a little bit more than maybe we’ve seen in the past. All of this is really frankly a long winded way of suggesting we don’t think we’re wildly inconsistent with some of the traditional patterns you’ve seen, but clearly the swings that we expect in 2010 are more pronounced than one might expect especially given that we really don’t think we’re going to find new tailwinds from macro consumer trends or from the FX environment. So all in, you kind of look at this, at the end of the day you look at the full year, we’re pretty pleased with our execution, pretty pleased with the idea of being able to grow earnings in pretty solid fashion in the next couple of quarters on the way to as much as 17% earnings for the full year, but it’s a long kind of tortuous story on the way there. I apologize for that, but I thought I’d give you all the color that’s on the top of my head right now.

[Bryan Keane:]

Just one follow up on that, on the international margins, those continue to surprise. You talked about Canada being a little bit of a hit, but would the international margins be able to sustain these levels or do we expect that to fall quite a bit as well?

[David Mangum:]

That’s a great question. I think if you look at international margins, as we go through the rest of the year, they can actually continue to tick up. They’ll obviously be down in Q4, just based on the way we’ve described seasonality and if you kind of compare even just the consensus, Q3 is the piece of the year when the consensus model is probably going to be the biggest change to match what we’re talking about. So you might have the margins international dip down in Q3 and then come back again in Q4, so they’ll match the pattern of the business, but they will actually continue to expand longer term and they’re doing what we hoped they will do over the course of the full year.

[Operator:]

Your next question comes from Robert Napoli – Piper Jaffray.

[Robert Napoli:]

I think we had this conversation on why the second quarter was going to be a lot weaker than the first quarter on the last call, but you have a history of being very conservative on your guidance and it seems like you’re even more so now. So I won’t even go there because it just seems like the numbers on your guidance is just too way too conservative, but that’s your history. The international margins and the U.S. margins may be a little bit more color. The U.S. margins hovering, the North American margins hovering around 25% while you’re having the macro problems in Canada. Maybe a little more color the outlook for North American margins; in your comments on the macro challenges in Canada, because it seems to me like the macro challenges in Canada based on all macro economic data, should be less than the macro challenges in North America and maybe some other markets.

[David Mangum:]

Just to make sure we’re clear on the pieces, Canada is a part of North America.

[Robert Napoli:]

Right, but your margins were very strong in North America, yet your growth was driven by ISO’s in the U.S, stronger than we expected, let’s put it that way.

[David Mangum:]

Fair question. If you pull apart the pieces and the way we’ve thought about North America this year is, we’re hoping for a year of sort of stabilization in the margin and the margin decline as you’ve seen historically. So while we expect North America margins on a full year basis to drop maybe a couple of points from last year, that implies that we actually are growing EBIT in both markets; U.S. and Canada for total EBIT growth overall. It also implies that despite seeing problems in gaming in terms of volume etc., we are doing a better job of matching investment levels and expense levels overall to revenue growth. The piece we can’t control as you properly pointed out is the mix of ISO business. It’s clearly the fastest growing, but I would not discount the growth and the positive sales success we’re seeing in the more profitable direct business, while not huge, it is a nicely profitable business and is growing nicely with a fairly solid sales track record as we exited ’09 into 10. And then all in, Canada is still quite profitable. We’re just not seeing what we hoped for there in terms of a real up tick in margin. The real thing we think we’ll see in Canada quite honestly, comes in Q3 and Q4. This sort of recent trend of the large retailers we have in Canada apparently taking more share in terms of the total percentage of proportion of transactions, really is just kind of coming into the fore as we exit Q2 and head into Q3 and Q4.

[Robert Napoli:]

You’re going to have a lot more cash, somewhat more cash with the sale of Money Transfer and on the acquisition focus; can you give any update on what you’re looking for? Is there any change or are there any other products that you might be interested in like bill payment products or anything like that, and is your focus still heavily outside of the U.S.?

[Paul Garcia:]

We’re primarily focused on merchant acquisition opportunities both domestically and internationally. We think that the international opportunities are more attractive just because of the growth dynamic, but there’s a number of attractive opportunities is the U.S. too that we’re pursuing. So the pipeline is pretty robust. It doesn’t mean that we wouldn’t be interested in a product or two that could complement that merchant acquisition strategy. And you’re right, we’re going to deploy that capital towards making some of these acquisitions and hopefully we’re very visibly working on them and hopefully we’ll have some things to discuss.

[Operator:]

Your next question comes from Tien-tsin Huang – JP Morgan.

[Tien-tsin Huang:]

I wanted to ask a little bit more about Canada. Is the situation that you’re seeing within your portfolio mix was big box retail that you service or is it, I’m just trying to understand what’s going on exactly with the mix and how that influences your business, and maybe if you could give us the volume or the transaction growth in the quarter that would be helpful.

[Paul Garcia:]

I can see your confusion because you’ve been conditioned to think about the U.S. presence is heavily driven by mid sized merchants and then of course our ISO strategy. We have a handful of big merchants, but we do have some. Canada is a portfolio that is much more balanced. We have mid sized, small, but we also have a large number of very big merchants. In fact, we had a successful quarter in signing lots of big merchants in Canada; eight fairly good sized merchants we signed last quarter. So we continue to add on to that portfolio. So when David is talking about these numbers, this isn’t the industry in total or Canada in total, these are our customers that we’re personally observing this.

[David Mangum:]

So when we say within just our customers, you’re talking about within that base, a couple of our larger big box retailers, the proportion of transactions we have attributed to that sub set of customers is higher now than it was two months ago, three months ago, four months ago. So that’s really the delta. The overall transaction growth frankly for Canada is about flat for the quarter on a year over year basis, so thus you sort of have this situation where that trend can exacerbate the fact that we’re roughly flat in terms of transactions, hence a more material impact than if we were growing X percent or Y percent.

[Tien-tsin Huang:]

So it’s really a spread impact is the impact to revenues.

[David Mangum:]

Exactly right. The larger customers by definition come in at a lower spread hence you end up at the lower margin overall, which is the impact that you’re seeing from Canada.

[Tien-tsin Huang:]

So where you’ve seen December, maybe a little bit of January, can you give us some idea of what point did it bottom out in terms of the mix change? Is it getting worse? Is it stabilizing? Just so we can model it through.

[David Mangum:]

It’s a great question. It’s tough to see what the trend is per se. I would say December was a lot like November so hopefully we did find bottom and we’ll have to watch January and February to really see if that bears out.

[Tien-tsin Huang:]

In Asia Pac, what’s sort of driving your confidence there that growth rate will accelerate back into the mid teens.

[Paul Garcia:]

We had some fairly atypical things happen that actually depressed our growth. We had a pretty good December, and we’re committed to double digit growth in that market. I think as we’ve discussed, personally on these calls, it isn’t so much about did we sign some more hotels or is there a drop off in tourism, that is part of the story for this. But this is still a fairly small business. The big emphasis is can we really grow this, and we’re convinced that we can and we will and the growth opportunities particularly for China and India are mind boggling. And so I would say stay tuned on Asia and hopefully we’ll be talking about some real meaningful numbers in the years to come from that region.

[Operator:]

Your next question comes from David Koning – Robert W. Baird.

[David Koning:]

In Q2 in the U.S. your sequential revenue was down about 1%. That’s about the best you’ve had in the last five years in terms of sequential growth in Q2, and Q1 was a lot like that. It was your best sequential growth in probably the last five years. So it seems like something pretty good is happening here in the U.S. and maybe a little different than how bad the economy is. Maybe you can just walk through why your trends are as good as they’ve ever been.

[Paul Garcia:]

The key to the U.S. particularly given the environment remains the ISO channel and the efficient sales channel that they operate on our behalf. The direct business is performing nicely and even the small piece that is indirect is performing nicely. But the key on a sequential basis is going to be the ISO performance.

[David Koning:]

You’ve talked in the last several quarters about some tough trends in Central and Eastern Europe with a couple of clients leaving etc. Is that starting to get back into growth mode or is that still struggling?

[Paul Garcia:]

It’s still challenging, and I just want to make sure I clarify. We have not lost any customers in Central Europe. We have renewed our three largest customers and at a time like this in this macro environment, when you’re renewing indirect customers, when your banks are reselling your product, that’s a tough renewal to work your way through. The team there has done that and renewed them all and actually, its five new customers, but the three largest absolutely have been renewed. So we’re feeling good about that operationally, but all in, the decline we expect for this year is not finished as we exit Q2. There’s a little bit more revenue challenges as we go through Q3 and Q4.

[David Koning:]

And then by Q1 will that turn back into growth again year over year?

[Paul Garcia:]

We’re hopeful, but actually I would phrase it a different way. To stay away from talking about specific quarters next year, we’re hoping to have a turn back toward growth in ’11, but let’s see how the rest of this shakes. Remember, what we’re going to have is renewals this year that will carry over into 2011, so when we get around to talking about ’11 on a full year basis, we’ll have a better picture as to whether or not we can overcome that with volume growth and/or new sales.

[Operator:]

Your next question comes from Darrin Peller – Barclays Capital.

[Darrin Peller:]

Just a quick question on the U.S. transaction growth rate; again it’s 19%. Can you first just comment on how you’re accomplishing that growth. I know you mentioned before the ISO channel, but it went from 20% to 19%. It was up from 16% the quarter before. How should we think about that going forward and also maybe the difference between transaction growth and revenue growth in the U.S. was a lot lower in this quarter than it had been in prior quarters, so maybe you could explain that as well?

[David Mangum:]

I think if you’re going to think about transaction growth going forward, mid to high teens is a safe place to think about it. 20% I think of as an anomaly. 19% is a nice strong quarter. Hopefully that’s on the way to a trend, but at the end of the day mid to high teens and let’s see how it goes. The toughest thing about all of this is everyone of these conversations tonight is sort of the elephant in the room; what does the macro to for this or to this, and that’s a tough one to pin down. If you think about the pieces of the 19% transaction becoming 15% revenue growth, and to your point, last quarter’s differential was about 11 points, we did see average ticket stabilize a bit this quarter as compared to last quarter. So on a sequential basis, which obviously helps, we have a little bit of revenue coming in from Auction Pay. As I mentioned on an earlier question, our indirect business, small as it is, is actually performing well and helping sort of offset that. We didn’t see the exact same quarterly performance last quarter from the indirect business. And then a little help with the margin from some of the October pricing changes from the Association, probably all in, that explains the pieces. It probably shouldn’t surprise you to see that range between four or eight or nine points in any given quarter.

[Darrin Peller:]

Were there any large or meaningful ISO additions or losses during the quarter?

[Paul Garcia:]

There weren’t any to speak of to the extent they were large. We probably would have put out an announcement but the base of ISO’s has been relatively stable for upward of four or five years. We’ll add from quarter to quarter, we’ll add a few ISO’s but they tend to be on the smaller side so they wouldn’t have that much impact either on the top or bottom line.

[Darrin Peller:]

We had heard some discussion around some ISO’s moving over to some pricing competitive players in the market and so maybe you could comment a little bit on pricing in the U.S.

[Paul Garcia:]

I think the story, if you went back five years on the ISO’s it’s been pretty similar. It’s a competitive market. There are a number of providers who provide services to this group like we do and I don’t see it changing. I haven’t seen it change dramatically. It’s competitive. It’s been competitive and I’m not expecting it to change.

[Darrin Peller:]

On the tax rate, can you just explain? I think it came out around 27% or 28% this quarter. Correct me if I’m wrong, but is that a little lower? That’s a little lower than we had modeled. Maybe you can just help us understand what we should expect going forward.

[David Mangum:]

As you know there are a couple of different ways to look at our tax rates, so I’m speaking to the effective rate you quoted at 27% which is probably the P&L rate. Either way, the dynamic in the delta is roughly the same. So on an effective rate basis, we posted at about 31.5% in Q1, turned around and posted 29% in Q2. The bulk of that difference is really due to we actually had a reserve for a certain statute in one geography, and that statute expired so we could actually just bring the reserve back into our books. So that created kind of a one time benefit this quarter. As we look out for the rest of the year, we’re probably looking at 32.5% or thereabouts for Q3 and Q4 on the way to a full year rate that I talked about earlier on the call of between 31% and 32%. If you’re looking at the face of the P&L, use those same sort of trends I described to build your model for what Q3 and Q4 would be. In other words, you quoted 17% which is a point or two lower than our effective rate. Apply the same logic to 32.5% I quoted for Q3 and Q4. One last follow-up to your earlier question I think relative to a note in the market about us losing an ISO, there hasn’t been any large ISO losses. We do lose small ones from time to time. There was probably a mid sized one that we had a piece of the business. I can think of two instances where we had a piece of the business, somebody else had a piece of the business, and they tend to when they do leave, oftentimes in the case of this one ISO, they sold their business off to another ISO and we may not see as much of the new business but we keep the base. It’s not in all cases, but it one I can think of and obviously in the note I saw wasn’t referencing them specifically, but there hasn’t been a dramatic impact to the base.

[Operator:]

Your next question comes from Jason Kupferberg – UBS.

[Jason Kupferberg:]

I wanted to start with a question on the G2 platform conversion, if you can just clue us in on where are you at this point? Are you still on track with the timelines you’ve talked about in the past? And just a follow up on that same topic, I know it’s premature to sketch out exactly quantitatively how much savings you’re going to get from the conversion when all is said and done but can you give us any kind of sense of how much of whatever that savings might be will actually get reinvested in the business rather than dropping to the bottom line to the extent that you have a sense for that at this point.

[James Kelly:]

I’ll start with the commentary color on the progress of the rollout and David can cover the second part of your question. Just to refresh everybody’s understanding, we’ve converted both to our front end and to our back end the G2 is the front end and our system is our back end. All of our Asia businesses that been converted which is seven, and that was completed over the summer. So the savings associated with those are already reflected in the financials and will be in the guidance that Paul and David provide. At the same time as we’ve worked on the Asia market, we have been actively working on the U.S. and we are almost through our beta here in the U.S. We have a number of merchants up and on the system to validate we are where we are expecting to be and I would tell you that we feel very confident that the plan is meeting its objective and we anticipate more color on that coming by the end of this year.

[David Mangum:]

The planned specifics as you guys will recall are for the U.S. migration to be effective the summer, perhaps early fall of 2010 so first quarter thereabout of fiscal 2011 for us with Canada and the U.K. to follow. More color on that in the next couple of quarters of calls just in terms of the roll out particularly in terms of the subsequent markets and the timing specifically for the subsequent markets. Now in terms of the actual financial implications, I don’t think we’re going to put a lot of final point on what we expect right now. We’ll clearly as we head deeper into the U.S. migration, be in a position to provide more color on our Q3 call and obviously more color and more meat on the bone in Q4 and we head into ’11 when we expect to see actual financial implications for the migration. In terms of what we reinvest, I think we’ll take that one on when we get more specific about the numbers. All in that will be facts and circumstances and a decision we make at that time, but we’ll reserve a little bit of judgment for that time. But a lot more to come as you know and we’re just happy to be executing as well as we are on the schedule right now.

[Jason Kupferberg:]

In the U.S. as far as the strategy to expand your roster of bank referral partners, any updates there? Do you think we’ll see or hear anything significant perhaps before the end of this current fiscal year?

[Paul Garcia:]

We’d love to say yes but firstly a lot of the dance partners are taken. There are opportunities to get somebody to dump their current dance partner and we’re working very hard on that. I’m not going to give too much more color other than that is a great channel and we’re working very hard on looking for opportunities, and quite frankly we think we have a compelling story and maybe self servingly, but we think a better story than anybody for a bank partner.

[Jason Kupferberg:]

Just to circle back on M&A a little bit, conceptually, how big of an acquisition would you be comfortable doing just based on what the capital structure looks like right now for the company and the kind of leverage ratios you might be comfortable with in the future. If you found the perfect strategic fit, where you do realistically max out from a size perspective?

[Paul Garcia:]

That’s a tough one. I think the best predictor of future behavior is past. So our comfort level is typically in the small to medium size and I think there’s a large body of evidence that would suggest that the companies that do that typically have a better execution record. However, there are some wonderful opportunities out there and if they fit the criteria you set and we’re reasonably near term accretive, and fit what we wanted to do, then I think that we would stretch and get some things done. We have access to the capital markets. We have reasonably available lines and these things are self financing in many regards if they’re everything you just said and I just said. So I would say that I would guide you towards we’re looking at deals that are probably medium to small, but if an opportunity presents itself, we would absolutely go after it.

[David Mangum:]

Maybe to add a little more color to the capital structure portion of the question, we sit right now at about one turn or so of EBITDA and we de-lever pretty quickly. We generate a fair amount of cash flow, something that we talked about before. We’d love to talk a little more with you guys about as we get a little deeper into how we go through free cash flow and EBITDA but at the end of the day, we could certainly be comfortable with two to three times EBITDA, two to three turns for the right character deals as Paul was just describing.

[Operator:]

Your next question comes from Thomas McCrohan – Janney Montgomery Scott.

[Thomas McCrohan:]

Could you break out your 19% transaction growth in the U.S. between debit and credit?

[David Mangum:]

We don’t actually break out particularly discretely, but at the end of the day, we’ve got 20% plus growth in debit and then obviously much more modest growth in credit. Probably the key as you think about it is we’re seeing a lot of growth in signature as well as pin. Pin remains less than 10% of our total transactions just as it has for some time. So all in, the mix isn’t wildly shifting. We’re getting an awful lot of signature growth.

[Thomas McCrohan:]

You sounded cautiously optimistic on the U.S. given the stabilization of average tickets. Can you give us some sense of what you’re seeing in same store sales growth in your merchants in the U.S.?

[Paul Garcia:]

I don’t know if we’re going to drill down quite that far. I think the point about the U.S. is we’re getting a little bit of help from stabilization and average tickets and that we’re pleased really with the relative level of execution in the business on the indirect side and on the sales side that’s helping pull the pieces of this together in a fairly solid fashion as the year goes on.

[Thomas McCrohan:]

On cash flow, since you were talking about it earlier, how should we think about the settlement processing assets and obligations which contributed about $600 million in cash flow for the first half? So is $1 billion of cash on hand a real normalized cash on hand or is some of that going to flow back out to whoever the counterparty is?

[David Mangum:]

At the end of the day not only is it going to flow back out, it flew back out. All joking aside, the available cash we have is a little over $200 million. That the check we could write tomorrow if Paul found a $200 million dollar deal he was describing earlier. There’s a little bit more of our earned cash that we put towards working capital, the management reserves and some of the merchant relationships. So probably the right way to look at that number is to take $.5 billion or even as much as $600 million out of that number. If you look back at previous quarter ends when we didn’t end on a Monday, and there you get more of a normalized view of where cash ought to be. But the $1 billion is absolutely illusory.

[Operator:]

Your next question comes from [James Casine – Bank of America/Merrill Lynch]

[[James Casine:]

I wanted to go back to Canada. I’m still trying to figure out why it was such a sudden shift in the quarter versus previous quarters. Was there anything going on with pricing with some of the large merchants?

[Paul Garcia:]

No, nothing specific going on with pricing. We really saw maybe the beginnings of this in Q but weren’t sure. In Q2 is where it kind of came through on the metrics and really changed our view of the trajectory of Canada for the rest of the year. So I wouldn’t suggest November 1 it was a wild change, but it did more come home to roost as the quarter went on.

[[James Casine:]

Can you give us the mix in your Canadian business between big box or national retailers versus small?

[Paul Garcia:]

No, we really can’t. We don’t break that out. We try not to drill down too much in any one market. In this case, as you look at the face of the segment income statement and the segment revenues that we do by country, it’s obviously going to stand out and it’s worth making sure we talk about it, but I don’t know that we’re going to drill all the way down there. Certainly we call these national accounts are big enough so that if the volume shifts towards them with their lower spreads, they can move the meter a little bit on growth rates.

[James Kelly:]

I’d also point out that relative to the U.S. where Paul mentioned earlier, we’re more a mid market focus. While we do have a number of billion dollar plus accounts here, that’s not enough to distort the overall U.S. mix. But in Canada, from the time we made the acquisition in ’01 and forward, it has always had a pretty good concentration of larger retailers, the largest supermarket chain being one example. Not that that’s a big box, but it’s a large piece of our business and to the extent that gets a bigger part of the share, the margins on those businesses are substantially different than a small or mid size store.

[[James Casine:]

I know it’s not that big but you mentioned that Russia was weak. I know it’s a recent acquisition, so maybe an update there.

[David Mangum:]

I’m glad you asked that question, so if I gave you that impression I apologize. When I was talking about Russia, actually let’s go back for a second. Russia continues to execute very well and is outperforming our expectations for this year. So it’s a great part of the story right now, and obviously as you know, we bought Russia for what it can help us deliver over the next two, three, four, five years more than Q2 or Q3 of this year. As we go into Q3, what we’re leaning as we operate the business and learn more about the market, is Q3 is a seasonally light year in Russia. So it’s not that it’s going to be weak. It’s actually just going to be seasonally light the same way that we expect that from the U.S. and we’ve learned the U.K. last year as well. It’s sort of making Q3 all in, a sequentially seasonally challenging quarter for us. But Russia is performing very well. You just go to the calendar. What goes on in Russia, they have a happy January and a lot less transactions over the course of what is our Q3, that December through February period.

[Operator:]

Your next question comes from Moshe Katri – Cowan & Co.

[Moshe Katri:]

Can you comment on any new pricing initiatives specifically in the U.K. and whether any contributions from that to margins during the quarter.

[Paul Garcia:]

We saw the beginnings of our re-pricing initiatives in the U.K. this quarter. We’re hoping for more impact in Q3 and Q4. I would tell you as we go through the year, we’ll probably see a little less impact in the U.K. from the re-pricing than we thought. We’ll be cautious as we roll that out. It is a tough macro environment and as we work with the bank to get the data and the things we need to know in order to roll out the pricing, we may see a little less impact than we might have originally thought. But still, when we roll out the pricing that actually is in place, it’s broad based increase for the first time in that base in awhile. It didn’t really change much of Q2. It has more of a quarterly effect in Q3 and again in Q4.

[Moshe Katri:]

Can we also get an update on some of the dynamics going on in Canada with Interac?

[Paul Garcia:]

I’ll do that and I’ll let David answer the last part of the question about pricing initiatives as well. The Interac is, we are ready to roll with the Visa and MasterCard products; Interac of course being the competition and Interac driving 65% of our transactions are debit oriented in Canada today, and they’re all on Interac. So the question is does the Interac model change and what impact does Visa and MasterCard products have. All we can do is prepare our platforms to provide those services and we are at that place, and now we are waiting to see like the rest of the world. I would tell you that we really don’t have a clue what that’s going to mean. I think it will have an impact. I think it will be slower to build and I think it will be a bit of a tail wind going into the future, but it’s going to take a little while for us to really give you guys some clear guidance on that.

[James Kelly:]

I wouldn’t expect what you saw in the interchange changes over the last year and a half to two years on the introduction of signature products into Canada where existing cards on the market were changed over overnight to these premium rewards cards at a higher interchange which after the interchange changes were introduced had a big impact on the market. In this new program for the debit products, the issuers will need to place new products into the market so the speed at which those issuers launch those cards and their acceptance by the merchants and the consumers will drive the speed at which you’ll see this initiative.

[Moshe Katri:]

Can you comment on the ongoing initiative or the ongoing relationship with China Union Pay in terms of where we are?

[Paul Garcia:]

That was part of the question that Tien-tsin asked about Asia. Although Asia, we’re very pleased with Asia and we’re looking at double digit growth in Asia, the real opportunity is something much more significant, and CUP will be a big part of that. So we have various relationships with CUP. Supporting the CUP card as holders of those cards travel to places outside of China and we are in fact providing those services in a number of countries and intend on providing them in additional countries. And then the other piece is allowing us to acquire CUP transactions in PRC in mainland China. Now we acquire CUP transactions today in Hong Kong and Macao and we’re acquiring them now in Taiwan which is a recent development. But we’re not able yet, no one is able to acquire CUP transactions in PRC. You have to be a Chinese institution, let me be clear on that. No non Chinese institution can acquire transactions in PRC. We are fairly far down the road to be given opportunities to do just that. We still have some work to do and we are hoping that in the not too distant future to be sharing with you some more details about our ability to do just that, but it’s a long complicated road.

[Moshe Katri:]

Do you have any preliminary data on some of the transaction volumes for example that goes through Beijing?

[Paul Garcia:]

Yes. We do in a couple of different scenarios. We process in Beijing for Visa, MasterCard transactions. We have an idea what CUP transactions are. And your question was relative to both of them? Moshe Katri – Cowan & Co. Yes.

[Paul Garcia:]

We’re not really going to give a forecast on CUP at this time, but when we get a little closer to having the ability to do just that, we will be sharing some data with you. In terms of Visa and MasterCard, we know precisely by city. We have offices in 10 of them and we just don’t break it down to that kind of level as you understand.

[Operator:]

Your next question comes from Kartik Mehta – Northcoast Research.

[Kartik Mehta:]

You said in an acquisition that you think there’s opportunities both domestically and internationally. So on the domestic side, were you implying size or strategic or both in terms of opportunity for Global Payments?

[Paul Garcia:]

We were talking about portfolios. We’re talking about bank portfolios. We’re talking about stand alone companies and we’re talking about companies that are in market niches that provide merchant acquisitions, so all of those categories.

[Kartik Mehta:]

Has the environment changed over the last six months domestically because of what’s happening in the economy or is there another reason maybe some more portfolios are available?

[Paul Garcia:]

I think you are seeing an up tick in available portfolios and I’m not exactly sure why that is. We are seeing it. I think your suggestion is as good as any. I think the economy has something to do with it, but we are indeed seeing more opportunities than we’ve seen in the last couple of years.

[Kartik Mehta:]

Would it be fair to say that right now margins out of Asia are probably lower than your overall international margins?

[Paul Garcia:]

That’s absolutely correct. In fact last year we didn’t have a margin in Asia so we’re actually going to earn money there. So it’s increased by thousands of percent. We think overall that the margin in Asia will be accretive to our margin in the U.S.

[Kartik Mehta:]

Does that imply that your Asian margins can get to or exceed your current international margins?

[Paul Garcia:]

I think it implies it can get to them. Whether it exceeds them, let’s see how things shake. That really depends a lot on how fast we see the growth in early stage markets in Asia. It’s based on the size and we need to complete the conversions but I don’t think there’s any reason why it can’t continue to press forward.

[David Mangum:]

I personally think Asia can exceed. I think it’s a dynamic market. It’s a faster growing market. But you know, I’m not going to give you time frames on that. That could be years and years.

[Kartik Mehta:]

There’s been a lot of talk about RBS selling its merchant business in the U.K. Apparently the story is out that there could be a buyer or is a buyer for that business. I’m just wondering, what are the implications of that business being sold for Global Payments?

[Paul Garcia:]

Sold to Global Payments or sold to someone else who now competes with Global Payments?

[Kartik Mehta:]

I’m assuming it can’t be sold to Global Payments so it probably would be somebody who competes with Global Payments?

[Paul Garcia:]

I would say that there’s lots of rumors including some newspaper articles that I would say are inaccurate. They haven’t reached a conclusion to sell that to any one person at this point that I’m aware of, and we’re really not in a position to comment any further on it. I tell you I wish them a lot of luck with their transaction. But if it does change hands and it goes to someone who competes with us, I think we’re very well positioned in all the markets that we’re in to compete aggressively with them. One of the reasons they want to sell the asset is they’re looking at a huge investment of hundreds of millions of pounds to bring up their infrastructure. So they’ve got some work to do.

[James Kelly:]

I would add that we have a really solid team that has executed. We’ve owned the business well over a year now and we’re well down the path of a conversion, moving that onto our system. So I think we’ll be well positioned regardless of who is the ultimate owner.

[Operator:]

Your next question comes from Andrew Jeffrey – SunTrust Robinson.

[Andrew Jeffrey:]

Did you call out the U.K. revenue this quarter? I don’t know that I heard it if you did.

[David Mangum:]

No, I did not. Once we started fiscal ’10 with a full year under our belts, I did not. I stopped calling it out. I can tell you as we look at the full year, you think of how we talked about the models for ’10 we are looking to see mid single digit growth overall from the U.K. You’ll recall last year it was doing on the order of $50 million to $55 million U.S. a quarter.

[Andrew Jeffrey:]

How much of that growth is volume versus price?

[David Mangum:]

A lot of it is price as you might expect. This is a market that’s going to be a low single digit, may mid single digit in healthy economic circumstance. So it’s a combination of a little bit of volume, a fair amount of price, but also I think of these as separate, you may not, it’s sales success bringing in new volume. So rather than call it same store sales volume growth, it’s a matter of we really think we’re executing well in that market. To Jim and Paul’s point a moment ago on a completely different topic, we’re executing well. The sales force as we’ve discussed before is in place and doing a pretty solid job bringing in new volume as well to help us grow a shade above what that market can grow on a normalized basis in better macro environment.

[Andrew Jeffrey:]

I assumed that market is not growing at all on a same store sales basis at this point. It’s probably contracting a big.

[James Kelly:]

If you think of the English economy, I don’t know how anyone could assume anything different. I agree with you. But remember as well, we’re only 17% to 18% of the market. We have the opportunity to gain market share even in a flat market.

[Andrew Jeffrey:]

Does that mean, I know you’ve made investments in the sales infrastructure in the U.K., does that mean continued investment or you’re pretty comfortable with where you are competitively? It seems like maybe you’ve got a window of opportunity there.

[James Kelly:]

I think as long as have referrals to the sales group, we’ll continue to invest in sales in any market. So I don’t see the U.K. ending in terms of adding resources. It may not grow at the rate that we did in the first year, but we will definitely fill in as opportunities present themselves.

[David Mangum:]

That’s really the key. You’ll recall the first year was a really heavy hiring and training year and it’s as we get to the middle of this year, we’re hoping to see productive new sales people and then we can be more targeted in the addition that Jim’s talking about.

[Paul Garcia:]

I’ll add something too. Although we really do like our position and we think that we are better situated than anybody in that market and we think we’re adding market share faster than anybody in that market. It isn’t like RBS and Barclay’s are laying down either. So we still have to win business every day.

[Operator:]

Your next question comes from Robert Dodd – Morgan Keegan.

[Robert Dodd:]

I’d like to go back to Canada if I can. When I look at a couple of different ways of hacking at the numbers, it looks like to me like the mix shift in Canada probably cost you $0.04 or $0.05 in earnings in the quarter. Is that the right kind of ball park? And I take it we’re looking at something worst than that in the December to February quarter. And then the second question for Canada, you’ve said that your product is Visa MasterCard debit introduction in Canada. Have you rolled out the pricing structure to your merchants that encompasses that or is that still pending and is there an opportunity to take some pricing up when you roll out that unbundled price?

[David Mangum:]

I’ll try the first part and pass it over to Jim for the second part. Without commenting specifically on your quantification which I really don’t think we’ll address, there’s enough national account volume to move the meter in Canada such that you can see the growth trend turns. In other words, we started out this year talking as you were doing your model for 2010 thinking about mid single digit revenue growth in Canada. Now what we’re seeing is probably low single digits for the full year including help from FX. So that probably gives you enough of a sense to know that this sort of mix shift can be decent size and will given the relative contribution of our Canadian operation, have an impact on the earnings line, again, not commenting specifically on the number you quantified. And it will have more of an effect in the February quarter. So at 50,000 feet the way you’re thinking about it makes sense and your assumptions make sense, again without necessarily commenting on the number itself you quoted.

[James Kelly:]

In terms of the roll out, the host was done the last year, the host being the processing/authorization system, and what we’ve been working toward is enabling our terminals that we own and rent to our customers. So these are the small to mid sized customers that have now been enabled to accept the cards, and the pricing has already been developed and rolled out to our customers as well.

[Robert Dodd:]

Just to be explicit, have you bid for RBS, the RBS portfolio?

[Paul Garcia:]

We appreciate the spirit of the questions, but as you could suspect, we cannot answer that.

[Operator:]

There are no further questions at this time. I’d like to turn the conference back to Mr Garcia for closing statements.

[Paul Garcia:]

Thank you and thank all of you for joining us on today’s call. Happy New Year and we appreciate your support of Global Payments.