Visa Inc.
Q3 2012 Earnings Call Transcript

Published: 26 Jul 2012

[Operator:]

Welcome to Visa Inc.'s Fiscal Q3 2012 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.

[Jack Carsky:]

Good afternoon, and welcome to Visa Inc.'s Fiscal Third Quarter Earnings Conference Call. With us today are Joe Saunders, Visa's Chairman and Chief Executive Officer; and Byron Pollitt, Visa's Chief Financial Officer. As always, this call is currently being webcast. It can be accessed on the Investor Relations section of our website at www.investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. PowerPoint deck containing highlights of today's commentary was posted to our website prior to this call. Let me also remind you that this presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are not guarantees of future performance and as a result of a variety of factors, actual results could differ materially from such statements. These include setbacks in the global economy and the impact of new financial reform regulations. Additional information concerning these factors is available in our last 10-K on file with the SEC. It can be accessed through the SEC website and the Investor Relations section of our website. For historical non-GAAP or pro forma-related financial information disclosed on this call, the related GAAP measures and other information required by Regulation G of the SEC are available on the financial and statistical summary accompanying today's earnings press release. This release can also be accessed through the IR section of our website. And with that, I'll turn the call over to Joe.

[Joseph W. Saunders:]

Thank you, Jack, and good afternoon, everyone. We are pleased to have the opportunity today to review our third quarter performance and the progress we continue to make in delivering against our strategy. Visa had another quarter of strong financial performance, posting net operating revenues of $2.6 billion, a 10% increase over the same period last year. After adjusting for our previously announced litigation reserve, net income for the quarter was $1.1 billion, a 20% increase over the same period last year. This equates to adjusted diluted earnings per share of $1.56, a 25% increase over the fiscal quarter of 2011. So with 3 strong quarters of operational performance behind us, which include insights into both the initial adverse Durbin impacts and our fiscal fourth quarter services revenues, we are now adjusting our 2012 EPS growth guidance to low 20s. And we continue to deliver our commitment to return excess cash back to shareholders. We used $461 million of our excess cash to repurchase 4 million shares during the fiscal third quarter. Looking ahead, our board has authorized an additional $1 billion share repurchase program. You've heard this before but it's worth repeating, the shift from cash and checks to digital currency is a global trend that we expect to continue well into the future. Today, more than 30% of global consumer spending, almost $10 trillion, remains on cash and checks worldwide. Interestingly, despite Visa's success increasing penetration of electronic payments over the past several years, the total opportunity to take share from cash and checks worldwide has actually expanded since our IPO, driven primarily by global population growth and expansion of many emerging economies where electronic payments currently represent a relatively small percentage of personal consumption expenditures. But we're never content just to benefit from evolving demographics, Visa is taking action to accelerate growth beyond the secular trend. To do so, we are focused on building and expanding the entire payments category in every market that we operate. That means in our partnership -- that means in partnership with our financial institution clients, putting more payment products in more people's hands, tapping entirely new market segments with diverse product offerings, expanding the places where Visa products are accepted and innovating next-generation payment technologies that create a superior payment experience for account holders and add value to financial institutions and merchants. And as we are successful in expanding the overall payments category, Visa's business benefits through diversity and resiliency, which helped us continue to grow through the past economic cycles. So while we are closely watching economic conditions that could impact Visa's business, including fallout from continued volatility in Europe and softening outlooks for both China and Brazil, our underlying business drivers remain strong. To begin my business review, let's first discuss the United States where credit posted yet another strong quarter, with payment volumes increasing 10%, Visa's fifth consecutive quarter of double-digit performance in that category. In addition to strength in the overall category, I'm confident we picked up share in credit as we've added new clients and built upon Visa's strong existing client relationships. Turning to U.S. debit, the situation continues to play out as expected and in line with our guidance for the rest of fiscal 2012 and '13. During the June quarter, Visa's aggregate debit payments volume growth in the U.S. was negative 9%, as our clients complied with the April regulatory deadlines. This was driven by the fall off of Interlink payment volumes, which came in line with our projections. Meanwhile, Visa Debit, which excludes Interlink, posted healthy mid single-digit payment volume growth, which we expect to continue. As predicted during last quarter's call, I am confident Visa experienced the trough for U.S. debit payment volumes during the fiscal quarter, and we are now seeing signs of improved performance in the fourth fiscal quarter. That being said and as we have stated previously, we recognize that some debit share loss resulting from this regulation will be permanent. As for implementation of our debit strategies to compete for merchant routing and win issuer business, I will simply say I am pleased with our progress and confident in our long-term position. Our efforts remain on track, and our strategies are gaining traction. We are absolutely delivering the value we promised to our merchant and financial institution clients, and equally important, the strategies are delivering on Visa's own financial and operational expectations. As for the CID, the status is essentially unchanged since our last call. I remain comfortable our actions are appropriate, and we continue to be in regular contact with the department providing information as requested. I'll keep you updated if and when the situation warrants. Switching gears, I'd like to briefly provide my perspective on the proposed merchant litigation settlement announced earlier this month. We reached a reasonable outcome that ensures the long-term health and competitiveness of the payments industry in the United States. Importantly, our current guidance for fiscal 2012 and '13 fully takes this agreement into account. I am pleased that we have settlements after an extensive process, coordinated by court-appointed mediators, which have been approved by class representatives, class counsel and the retailers who filed separate suits. We anticipate these will have support among the retail community in the U.S. because it is a fair and an appropriate compromise for all parties, and that the agreement will be approved by the court. As for the next steps, preliminary court approval of this agreement is expected in the fall, and Visa is preparing to begin implementation in the early part of 2013. Bottom line, we are moving towards ending a 7-year dispute with an important constituency of our client base

[Byron H. Pollitt:]

Thank you, Joe. As is my practice, I'll begin with some observations and call-outs. First, note that we reported the quarter on an adjusted basis. We eliminated the previously disclosed litigation accruals associated with both the MOU in the merchants litigation and the preliminary agreement with the individual plaintiff, since both of these events are covered by our retrospective responsibility plan. These accruals, which totaled $4.1 billion, resulted in a quarterly after-tax loss of $1.8 billion on a GAAP basis. Excluding these litigation accruals, we reported solid earnings per share of $1.56 for the quarter. Second, the all-in impact from U.S. debit regulation, which includes restructured pricing, incentives, other mitigation strategies and volume loss, cost us about $0.04 in EPS for the quarter. We expect a similar, if not slightly higher impact in the next few quarters, as more of our debit volume is exposed to lower variable fees and incentive agreements. As we have stated before, this is already incorporated into our guidance. Third, foreign tax credits resulted in a benefit of $56 million or $0.08 to our adjusted diluted EPS this quarter. These tax credits were contemplated in our full year guidance, with the amount recognized in the third quarter representing the total for the year. Fourth, U.S. revenue growth has been supported by 5 consecutive quarters of double-digit credit payment volume growth, most recently 10% in the quarter. Through the 21st of July, credit payment volume growth has comped at a 9% rate, consistent with a somewhat tepid but sustained U.S. economic recovery. Fifth, as anticipated, aggregate U.S. debit posted a negative 9% growth rate in the third quarter, led by Interlink payment volume, which was off 54%. So far, the month of April has proven to be the trough in debit payment volume loss. And since then, we have seen sequential monthly progress during the quarter in recapturing portions of this Interlink volume. Importantly, Visa Debit, which excludes Interlink, continued to post solid mid-single-digit payment volume growth. Sixth, client incentives for the quarter, as a percent of gross revenue, were 19%, consistent with our full year guidance range, which is weighted to the back half of the year. Higher incentives had 2 drivers

[Operator:]

[Operator Instructions] First question comes from Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch:]

If you -- I was hoping you could flesh out a little bit the steps that you've taken now that we're kind of 3 months further in with respect to the debit acquiring fee and you've talked about some of the effects. But what's actually happened? How much of that has been implemented? And could you talk a little bit about how that's kind of been -- how that has flowed through the numbers?

[Joseph W. Saunders:]

Well, we're -- I'm not exactly sure about the specific question, but I'll -- there were 2 significant things that we did, one was the pricing and one was the paid or the debit card change. So from a fixed pricing point of view, that's been fully implemented. From a paid or a debit card point of view, that has been significantly implemented, but it's being implemented in phases and it will take a few more months to get it fully done. Remember, however, that we retained the Interbank logo on the majority of our largest customers. And so none of that volume, as long as the Interlink logo is there, will go through paid.[ph]

[Operator:]

The next question comes from Dan Perlin with RBC Capital Markets.

[Daniel R. Perlin:]

So what I was thinking is now that you have at least arrived at this settlement proposal, I'm wondering if you're thinking about the utilization of your free cash flow differently from what we've seen over the past several years since you funded the escrow account. And then secondly as you talk about the investments that you think are going to be important to the merchants, when we look at the incremental margins in the quarter versus sort of past couple of years, we're kind of at a low level -- or certainly [ph] close to a trough level. And I'm wondering if we should be thinking about the investments going forward at these more incremental margin levels.

[Byron H. Pollitt:]

So let me take the first one. We have no change whatsoever in our philosophy of returning excess cash to shareholders. To the extent that we are not placing cash in the escrow account, the alternative would be open market repurchases of our A shares, and that is exactly what we intend to focus on. So no change on that front, as further evidenced by the approval by the board to authorize a new $1 billion dollar share repurchase program. Second, with regards to margins -- let me reframe that, last year, we delivered about a 60% operating margin. That is our guidance for this year. The lower margins, that operating margins you're seeing in this quarter and we'll see again in the next quarter are all consistent with our guidance of about 60% for this year. As you may recall from our -- at the beginning of the year earnings call, beginning of fiscal year, we indicated that it would be about 60% for the year, but that we would be a little higher in the first half of the year and a little lower in the second half of the year, largely due to a ramp-up in technology investments and a weighted marketing spend for the Olympics timed with the second half. So this year, past year, about 60%, and we'll let you know what '13 looks like in another quarter.

[Operator:]

The next question comes from Darrin Peller with Barclays.

[Darrin D. Peller:]

Can you first start off, you said in the past you would expect an acceleration of revenue growth in fiscal year '13, I think, versus 2012 levels. Can you just comment on the main drivers of that, especially if you expect incentives to be sequentially higher year-over-year next year?

[Byron H. Pollitt:]

So what we said was -- or meant to communicate was that this was a comment around the implementation of the Durbin rules. And that what we expected is that once we had annualized the impact of Durbin, which will take us through the first 2 fiscal quarters of next year, once we have lapped those rules and the Durbin impacts were in our base, at that point, everything else being equal, we would expect an acceleration, particularly in our -- specifically focused on our debit business because we've got the Durbin impact now in our base. So that's what we meant by that. Everything else being equal, we would expect to see it. Again, with regards to revenue growth for next year, we'll be much more specific about that on the next quarter call.

[Operator:]

The next question comes from Rod Bourgeois with Bernstein.

[Rod Bourgeois:]

Yes. So, Byron, just to follow up to that, does that mean your fiscal '13 guidance signal is not relating to overall revenue growth? It's just related -- it's just relating to the growth in your debit business in the U.S? And then I guess the follow-up to that is that you indicated that your growth trends are not showing much effect from macro issues and you've had a string of pretty good incremental wins that are presumably offsetting what appears to be a general slowing in retail spending. Is there any way to quantify the recent contribution in your growth rate from new wins that are occurring as an offset to the cyclical pressures that are out there?

[Byron H. Pollitt:]

So let me -- yes, let me -- I'll go first in responding to that. So the guidance, the specific quantitative guidance we have for next year for '13, number one, is EPS growth in the high teens; number two, incentives that are modestly, slightly higher than what we expect to experience this year. That's the extent to which we've guided to '13. And remember, when we said we expect revenues to generate, that's everything else being equal. We expect to have debit -- the U.S. debit part of the business annualized halfway in through the year. So in order -- I mean honestly, to give a much more informed perspective on revenue growth for next year, we'll wait to the fourth quarter call at which point we'll have much better visibility of what we're looking at going in. Meanwhile, we are reconfirming the guidance that we currently have for fiscal year '13. With regards to incremental wins, you can say we have some, certainly on the credit side. We don't have -- we have the opposite, so to speak, courtesy of the U.S. government on the debit side. And so in balancing those and looking at the current underlying revenue drivers of cross-border volume growth, transaction growth, inside the U.S., outside the U.S., that's really what's underpinning our guidance comments for '13 -- for balance of year and for '13 to date. Joe?

[Joseph W. Saunders:]

Yes. I don't think that there is a significant amount of traction yet on some of the credit wins in the United States. So I don't believe that, that's where the growth is coming from. But certainly it is cause for optimism as it relates to our credit volumes going forward. I would also reference a lot of our wins outside of the United States, which are picking up steam as we talked about and will provide revenue. And I'm sure, as Byron has pointed out, that everybody understands, a lot of our '13 guidance was a reflection on how we would fare given the Durbin legislation. Right now, our metrics in every other regard are quite strong. And we will, as Byron said, address our expectations next quarter.

[Operator:]

The next question comes from Glenn Fodor with Morgan Stanley.

[Glenn Fodor:]

I applaud your comments about working more collaboratively with merchants. The fact is though, we're just now hopefully turning the chapter on a relationship that's had tension involved for many, many years. So this is a big step forward for both sides, positive step forward. But besides the technology that you alluded to earlier, I mean how difficult do you think it will be to change your overall cultural approach and just general relationship overall with the merchants from a very high level, aside from the actual product level?

[Joseph W. Saunders:]

There's been a, I suppose that you could characterize for the last 7 years, as a contentious relationship. But the fact of the matter is when you look at the history of the usage of electronic payments, it's been growing quite rapidly during that period of time. So I'd characterize it as a kind of a love-hate relationship, I mean something that you sometimes can't do with and what generally you can't do without. And I think that we are in a position to reach out and do much more going forward, particularly because of the technology that we're embracing that will bring a new level of value to the merchant community. And I'm very, very optimistic about it. We work with the merchant community through all of this, even as you talk about what's going on right now or as certain merchants may complain about this or that. Remember, we have incentive contracts with a significant number of them. And so we are working with them. We're dealing with them on a daily basis, and we think that those relations will improve as time goes on. Certainly, that's going to be our endeavor.

[Operator:]

The next question comes from John Williams with UBS.

[John T. Williams:]

Just very quickly, Byron, I just wanted to get more detail on your comment that you said you're seeing no clear signs of a slowdown. I think if you look at the other folks in the industry, American Express is the one that really comes to mind. Do you have anything to say regarding the affluent calling out high-end versus low-end differences that you might have seen, maybe traveling hotels or any other somewhat discretionary verticals that you might have seen some change in behavior over the last few months?

[Byron H. Pollitt:]

I think it's too early to make that conclusion. John, what we do is watch -- we break down the quarter month-to-month. And there can be some very wide differentials within a given quarter. Let me give you an example. In the quarter just completed for U.S. credit, we grew 8% in the month of April, 12% in the month of May, 10% in the month of June. All-in, it delivered 10% growth. And so when we look at the monthly kind of progression over the past couple of quarters, these are all -- they bounce around month-to-month, but they're all pretty healthy. And so I think the hardest part of a trend to call is the beginning. And given the kind of healthy growth rates we're experiencing, it's -- we just don't see a discernible trend. But I promise you, we will update everyone quarter-by-quarter, and would be happy to go through monthly progressions to help give a better flavor for this. So I'm not saying it's not happening, just saying we're not seeing it yet.

[Operator:]

The next question comes from Tien-Tsin Huang with JPMorgan.

[Tien-Tsin T. Huang:]

Just wanted to ask a few questions on the litigation settlement. So what's the process in dealing with the merchants that opt out? And also, what's the plan for the, I guess I'd call it, overfunded litigation escrow? How are you going to deal with that as the Class B shares come unlocked? And then lastly, maybe -- don't be mad, Jack. Just what's the -- in terms of the surcharge, no surcharge rule going away, how much volume in earnings do you estimate will be at risk by allowing surcharging in the U.S.?

[Joseph W. Saunders:]

Well, I'll answer the question about surcharging, and then I'm going to let our counsel who watched over this litigation for the past 7 years make some comments about the rest of your question. We think that the position that we struck, and if you look at the MOU and you look at all of the details of surcharging and how it can be affected and what the caps are and so forth and so on, we think it's a fair settlement. And we do not look at surcharging per se as it relates to this litigation as something that will -- it significantly affect us at all. I mean, that's our feeling about it. That's our position. We could talk about this for hours, and of course we have and we did before. We agreed to do anything, and we'll just have to let it unfold. But I think it's a -- I think that the settlement is a reasonable settlement for both sides. Josh?

[Joshua R. Floum:]

Thanks, Joe. As to the process going forward, we are very confident that the court is going to approve this settlement. And the reason I say this is this case has been pending for 7 years. And during a great deal of that time, there has been a court-ordered mediation process with 2 mediators and the involvement of the court. And at the end of that time, all of the class counsel, the class representatives, the individual merchants, as well as the financial institution defendants have agreed to the deal. It's a fair and reasonable deal. And therefore, we're comfortable that at the end of the day, the court is going to approve the settlement.

[Byron H. Pollitt:]

And with regards to the, Tien-Tsin, the unlocking of the shares, we've had a lot of practice with the unlocking of the C shares. And as a result, we are very confident that when that time comes, we'll be able to manage that with barely a ripple with regards to impact on stock price.

[Operator:]

The next question comes from Jason Kupferberg with Jefferies.

[Jason Kupferberg:]

Why don't I just pick up on that question, if I could. And just thinking out beyond the court approval coming in the fall that you guys expect, can you guys just clarify what sort of true legal recourse the retailers that choose to opt out of the settlement, what kind of legal recourse they actually have? Obviously a couple of the biggest have publicly announced that they do not support the settlement, which probably doesn't surprise anybody. But if you can just clarify for all of us what kind of legal recourse they actually have when and if they formally opt out, that would be great.

[Joshua R. Floum:]

Right, the way the deal is structured is that opt-outs, and you always expect a couple in a class action lawsuit, can sue only for monetary relief. There's something called a non-opt-out class for injunctive relief. What that means is that all of Visa and MasterCard's rules in existence as of the time of approval are released both by the opt-ins and the opt-outs.

[Operator:]

The next question comes from Bryan Keane with Deutsche Bank.

[Bryan Keane:]

I just want to ask about the mid-single-digit growth in the Visa Debit line. I guess I thought that number would be a little bit higher. Has that trended down over the last couple of quarters? And then if it has, what might be driving a little bit slower growth in Visa Debit? Is it a move towards PIN, loss of share, Durbin?

[Joseph W. Saunders:]

Well, I mean, we always expected to have some deterioration in the magnitude of that growth number. And as a matter of fact, it's doing better than we had originally anticipated. Remember, when the whole Durbin thing came, and you had a number of debit cards with rewards associated with them, it drove financial institutions to promote it much more heavily. It encouraged consumers to use it considerably more. And so part of the whole Durbin legislation was a little bit of a damper on debit card transactions in general. Not that they were going to stop, it's just that the rate of growth was going to slow down. So we're actually quite happy with where we are.

[Byron H. Pollitt:]

And I'll just add a little quantitative perspective. We were -- in the fourth fiscal quarter of '11, we were kind of at the upper end of mid-single digits in that category. We've remained in that range for Qs 1, 2 and 3. And if you look at Q2 on a normalized basis, pulling out the leap year, the growth rates for Q2 and Q3 are identical. So I would say this is a -- with the overlay of what Joe said in terms of kind of a modest level of impact, it has been relatively sustained during this fiscal year.

[Operator:]

The next question comes from Wayne Johnson with Raymond James.

[Wayne Johnson:]

This question is for Joe. Could you give us an update on how V.me is progressing for commercial launch? Is Visa still on track with that? And if you could just provide kind of initial expectations how we should see this rollout this fall?

[Joseph W. Saunders:]

Well, yes, I think we are right on track with the Click-to-buy and aliasing capability that we suggest that we would rollout by the end of the year. It is up. It is live. It is running. We have -- we currently have 6 relatively large merchants on the system. We do not have a significant number of consumers at this particular point in time. But we're on schedule with several financial institutions to begin that in the very near future. And so right now, we're still anticipating a holiday season rollout of the project. And of course it'll gain a lot more traction in 2013 than it will at the beginning of 2012. But we're happy with the progress, we're happy with the performance and we're happy with where we are, both with the merchant community and with financial institutions.

[Operator:]

The next question comes from Tim Willi with Wells Fargo.

[Timothy W. Willi:]

Could you talk a bit about anything you've seen in Latin America, looking at sort of the regional data, constant currency, that one seemed to show more of a slowdown at least for the June data, while all the other regions sort of held steady. So I'm curious that there might be something relative to that economy or country that impacted those numbers that might be in play for a couple more quarters. And then, if I could slip one other in, just any thoughts around the average credit ticket in the U.S., which had been climbing steadily out of the recession and now seems to be in a slightly sort of negative position. Is that fuel? Or is there something else you might think would account for that trend in the last couple of quarters?

[Byron H. Pollitt:]

Let me start with the Latin America. With regards to currency -- first of all, let me just mention to the group that we do hedge exposures. So whatever impact, with the exception of 2 countries, which I'll turn to in a moment, we can dampen the impact on FX. With regards to currency-specific countries, we are seeing a depreciation in Argentina and a continued depreciation in Venezuela. The outlook for devaluation, I would say, is nothing's a certainty, but I -- at some point, it looks like we're heading to that. And you can't -- there's no economic hedge for either one of those 2 currencies. So is that a bit of a drag on our Latin America business? Yes. Is it hedgeable? No. And so -- but that's baked into the numbers we reported. With regards to any other country call-out, I would say Brazil has tempered a bit. There has been a tax placed on credit usage for cross-border travel, which has definitely put a bit of a break on the exuberance of the Brazilians to see the world. That tax is not applied to debit, but it is applied to credit. And so I would say overall, particularly the rest of Latin America that the business is strong. It has very, very healthy growth rates, unimpeded by shifts in currency. Average credit ticket, no substantive change in that metric for the moment. But if you'd like something more specific, I'm sure if you call our IR group, Jack or Victoria would be able to give you something more specific.

[Operator:]

The next question comes from Craig Maurer with CLSA. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division Two questions. One, a question for counsel relating to a previous answer, when you say opt-outs can sue only for monetary relief, does that include relief from interchange? And secondly, for Byron, the yield on processed transactions in the quarter jumped significantly, which was expected, but it was a lot more than what we were looking for. Do you think that the yield posted in the quarter is a good one to think about going forward?

[Byron H. Pollitt:]

Let me start with the yield question. So the yield increase in the data processing category absolutely was expected. Remember a couple of things as perspective, that as part of our Durbin mitigation strategies, we are -- we implemented a fixed acquiring network fee, which is completely captured in the DP category. We also reduced variable transaction fees, which are also included in the DP category. But we then introduced a degree of incentive offset, and that appears in a completely different line. So while the growth yield for DP goes up, it's not a true picture. And instead, you really ought to be looking at net yield, which I'll come back to in a minute, as it relates to Visa Inc. revenue yield. With regards to the DP yield, there's one other factor involved, which will -- which has an impact on the calculation, which is our lowest yielding product is Interlink. So as -- and that has borne the brunt of the loss as we conform to the new rules. And so as Interlink moves out of the denominator in terms of yield calculation, it has the least impact on the numerator and automatically, the yield moves up. And so you have both of those indicators going forward. There are a number of factors impacting the DP line. Debit is one, including Interlink; CyberSource booked into the DP line. And so I think what it's going to take is the next 2 or 3 quarters or so in order for us to kind of reset what the base trend lines ought to be projected off of with regards to data processing. So I think -- wish I could be more helpful, but I think it's going to take another couple of quarters before this sorts out. When you put all of this together and you look at the Visa Inc. revenue yield, of which DP is an important component, but that captures the incentives. In the way that we capture and measure yield, our yield for the third fiscal quarter of '12 is actually flat with the yield we experienced in the third quarter of '11, fiscal year '11. So a lot of moving parts. This is where we're sorting out, and I'm afraid it's just going to take 2 or 3 quarters before we can we reset the different trend lines on the different fee categories.

[Joshua R. Floum:]

And as to your first question, opt-out merchants can only sue for monetary damages. And by the way, those claims would be covered under our retrospective responsibility plan. Claims for things like rate relief or interchange reductions, that's in the nature of injunctive relief. And opt-outs cannot make those claims.

[Operator:]

The next question comes from Sanjay Sakhrani with KBW.

[Sanjay Sakhrani:]

It sounds like you guys are still see some reasonably good underlying organic growth globally, and I'm just wondering how we reconcile that with kind of the darkening clouds commentary you mentioned before. And then secondarily, I was just wondering if you could talk about the -- how the tax benefit will be utilized in terms of the litigation escrow reserve build.

[Joseph W. Saunders:]

Well, Byron, why don't you answer the second?

[Byron H. Pollitt:]

Yes, I'll do the first one. With regards to the litigation of the -- how the tax impact will be utilized, there's a different treatment for GAAP, and it's a different treatment for cash flow. So for GAAP, we go ahead as soon as it's probable and estimable, which we concluded it was, we go ahead and put that through the income statement. So on a GAAP basis, that's now behind us. With regards to the cash flow impact, you can't record the deduction on your return until you actually make a payment. And so the payments associated with this are potentially some time out. And so there will be no cash flow impact this year associated with that once the agreement is -- once we're further along -- much further along in the litigation process, we'll be in a position to actually make payments, at which point we can then take the tax deduction. We'll give you some perspective on that on the fourth quarter call.

[Joseph W. Saunders:]

And as it relates to your first question, we -- I mentioned in my comments that the demographics of the world are changing, the number of places that accept electronic payments are increasing. And so there is some countercyclical things that occur and allow us to build volume even when economies are slowing down to some extent. That's always the difficulty we have in calling out what's going on in the world or what do we see or how do we measure or know exactly what's happening. And it's tough because more and more people have access to electronic payments, and more and more locations accept electronic payments. And those have to be factored into the equation.

[Operator:]

And the last question does come from Glenn Greene with Oppenheimer.

[Glenn Greene:]

I'll just ask on the U.S. debit volume trends. You sort of saw -- I mean, through May, I think you gave us an update, it was sort of negative 8 end of the quarter, kind of negative 9. And encouragingly, it sort of looks like it improved in July to negative 7. So I mean, I guess the question -- or do you think we're sort of in a sustained, improved trajectory? And obviously the pricing efforts are having some effect here, but where do you think we go from here?

[Byron H. Pollitt:]

We're in uncharted waters. We like the notion that it's an improving trajectory. And we will -- honestly, we'll know better how competitors respond to our strategies, and I think this is still very early days in terms of trying to project how this will play out. Remember, the rules only went into effect April 1. So we've only had, what, 3 months and 3 weeks of operation under these new rules. And to date, we're pleased with how our strategies have taken hold to start, and we'll report on how well they continue to perform in the upcoming quarters.

[Joseph W. Saunders:]

Without making an absolute prediction on the heels of what Byron just said though, I will remind you what I said in the remarks I made earlier, and that is there will be a permanent deterioration in our debit card volume as a result of the Durbin legislation. There's absolutely no question about it. So when we talk about waiting and seeing, we're kind of waiting to see where it gets to, but I don't expect to be -- I don't expect to be close to where we were when the whole thing started.

[Jack Carsky:]

Well, that wraps it up. Thank you, all for joining us today, and thank you to Josh Floum for his comments earlier, our special guest star. If anybody has any follow-up questions, feel free to call Victoria or myself.

[Operator:]

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.