Mastercard Incorporated

Good morning and welcome to the MasterCard Inc. Q2 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. Warren Nisha, you may begin your conference.

Thank you Julie, good morning everyone, and thank you for joining us for our second quarter 2022 earnings call. With me today are Michael Meebok, our Chief Executive Officer, and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions. You can access our earnings release, supplemental performance data, and the slide deck that accompany this call in the investor relations section of our website, MasterCard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP, currency neutral basis, unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP reported amounts. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding MasterCard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I will now turn the call over to our Chief Executive Officer, Michael Meebok.

Thank you, Warren. Good morning, everyone. Starting with the key highlights for the quarter, we delivered strong revenue and earnings growth with further improvement in our underlying operating metrics, notably in cross-border travel. Quarter two adjusted net revenues were up 27 percent and adjusted operating income up 40 percent versus a year ago on a non-GAAP currency neutral basis, excluding special items. On the macroeconomic front, we continue to monitor a number of factors that have both positive and negative influences on economic growth. Inflationary pressures have remained persistent and we're now seeing central banks taking even more aggressive steps to reduce inflation, as we have seen the Fed yesterday. The situation has been compounded by geopolitical tensions and supply chain constraints, which have eased from pandemic peaks but remain in many industries. Despite this, unemployment rates remain low, wages are rising, and consumer savings levels remain high. With this backdrop consumer spending and particularly travel related spending remains strong. Looking at this from a geographic standpoint, US retail spending remains healthy as consumers navigate a high inflation environment. Spending has been aided by strong job creation and the buildup of access savings during the pandemic. According to our MasterCard spending pulse, which is based on all payment types, including cash and check, U.S. retail sales ex-auto, ex-gas were up 6% in the second quarter versus a year ago. In Europe, spending trends are positive, although the risks related to both the supply of natural gas and higher interest rates remain headwinds. Growth in Latin America continues to moderate following a strong rebound in 2021. Asia has generally lagged the recovery of other regions. While COVID-related requirements have been relaxed in several countries, strong restrictions remain in others. Asia continues to have significant upside potential. Looking more specifically at our switched volume trends, domestic volumes continue to show strong growth with notable strength in airline, lodging, and restaurant spend. You've seen some shift in spend towards gas and groceries from discretionary categories like home furnishings in the U.S. Cross-border continues its strong recovery as border restrictions continue to be relaxed. Cross-border travel in quarter two has now reached 118% of 2019 levels. Cross-border card not present X travel continued to hold up well. Notwithstanding the strength in consumer spending, we will continue to watch the environment closely, including fiscal and monetary policy responses to high inflation and their potential impact on spending. Within this environment, we will continue to be nimble in managing our expenses. We have the flexibility to respond quickly across a number of levers, as we showed in 2020. Having said this, we will continue to invest in the business to drive top and bottom line growth over the longer term. We have a well-diversified business model, and we are executing against our three key strategic priorities, expanding in payments, extending our services, and embracing new networks. And here's an update on how we're progressing against each one of those. First, we're expanding in payments by continuing to grow card volume, driving acceptance growth, and leaning into innovation to capture other prioritized payment flows. We're driving growth in card volume with new consumer, small business, co-brand, and travel wins globally. In Canada, we're excited to announce that we secured a new partnership with CIBC that creates an opportunity for material share shift for MasterCard with the bank. We also renewed our relationship with the Royal Bank of Canada, including a range of services that will enable us to grow our proprietary and co-brand volumes with them. In the U.S., We established a new partnership agreement with the U.S. Bank, which extends our current debit, credit, co-brand, and small business credit programs. It includes several new products, including the first large-scale launch of a consumer credit product, a small business credit offering, and the development of Buy Now, Pay Later installment solutions. We're excited to announce that we have completed the conversion of Gap Inc.' 's existing 10 million card members to MasterCard across the Old Navy, Gap, Banana Republic, and Athleta brands. We renewed and expanded our co-brand with Brooks Brothers, issued by Citi, and we have renewed and expanded our co-brand with Barnes & Noble in partnership with Barclays. Outside of North America, we have secured several new wins and renewals, including a number of deals that position us well in Asia Pacific as the region rebounds from the pandemic. In Australia, we've extended our partnership with Bendigo and Adelaide Bank Limited, enabling us to maintain exclusivity with Bendigo and convert several of their regional debit portfolios. We're pleased to announce that National Australia Bank and MasterCard have signed an agreement to retain and grow the MasterCard components of Citigroup Australia's consumer business that was acquired by NAB. This marks the first significant issuing relationship between the two companies in years, and we look forward to partnering to grow these portfolios. In Hong Kong, we partner with Citibank and HKT's loyalty program and digital ventures arm, The Club, to launch the Citi The Club credit card. In India, we're happy to report that the embargo on new issuance has been lifted. Issuers have restarted card issuance and they are eager to expand business with us. An example is Yes Bank, where we signed a consumer credit agreement that will enable us to maintain a majority share and include the commitment to scale our world elite portfolio. We've worked hard to expand our travel-oriented portfolios, which positions us well to capitalize on the strong recovery of travel. For example, in Asia Pacific, we entered into a 10-year commercial card issuance deal with Trip.com, one of the world's largest online travel agencies. In the UAE, we renewed our co-brand portfolio with Marriott. In the U.S., we have renewed our long-standing co-brand relationship with Amtrak. And we've extended our co-brand partnership with Virgin Atlantic in the U.K., a partnership that will leverage our test and learn, innovation labs, and Session M loyalty assets. We're also driving growth in payments by continuing to expand acceptance. MasterCard has now accepted over 90 million merchants' locations worldwide, And we have more than doubled the number of acceptance locations over the last five years. MasterCard has been driving tap-on-phone innovation, enabling billions of active smartphones to become potential acceptance devices, with over 130 deployments across 55 markets. This includes working with Apple to enable acceptance of MasterCard contactless cards and digital payments through their tap-to-pay on iPhone capability. It allows businesses to accept payments directly on their iPhones. MasterCard is further empowering the ecosystem through our cloud commerce capabilities, which enables our channel partners to quickly deliver cost-effective acceptance. It also provides easy access to a range of payment solutions and services, including tap on phone, QR, installments, loyalty, data insights, and more via the MasterCard cloud. In addition, we continue to drive adoption of our click-to-pay online guest checkout capability. Click-to-pay is now enabled in over 20 markets across all regions, and transactions have been growing quarter over quarter. We're expanding in payments through innovations like MasterCard installments. Our open-loop Buy Now, Pay Later program has been very well received. MasterCard's installment is now soon to be live with Saudi National Bank and several new partners adding their support to the program. Examples include Cross River Bank, Evolve Bank & Trust, Jiffity, Live Oak, Mocha Financials, and WebBank in the U.S., as well as HSBC, NetWest, and JP Morgan's payments division in the UK. In addition, Apple recently announced Apple Pay Later, which uses the MasterCard installments program. Finally, we're driving growth in payments by leaning into innovation to capture a prioritized set of new payment flows, including disbursements and remittances, commercial point of sale, B2B accounts payable, and consumer bill pay. This is at the heart of the investments we've been making to develop a range of capabilities that span cards, account-to-account payments, push payments, and blockchain. We're at various stages of scaling our capabilities across these different flows, and we're making steady progress. For example, we're expanding network reach through new cross-border services relationships with partners like Doha Bank and Vodafone in Qatar, and UPT, a leading money transfer operator in Turkey. We're targeting specific use cases and scaling distribution through B2B partnerships with MasterCard Send. A few examples, Caesar Sportsbook will leverage Send for instant payment of online winnings. And PaySafe will integrate MasterCard Send into their payments platform to enhance the payout capabilities offered to their merchant customers in the UK and the EU. Now, turning to services. Our services capabilities have proven to be a tremendous growth driver and differentiator for our business, built on a foundation of investments and experiences built over the years. Looking forward, we continue to see a significant opportunity for services in three primary areas. First, services will continue to enhance the value of payments. Services make payments intelligent, safe, and secure. For example, our identity check payment authentication service is driving double-digit improvements in approval rates. We are working with Postapay in Italy to support the deployment of their issuing portfolio, assist in growing their acquiring business, and enhance their customer engagement approach. And our consulting team in Europe is engaging with ING to help them create a seamless payment experience for their clients. Second, we see the needs of our customers expanding beyond payment. We can leverage our full suite of differentiated services to address these needs. A recent example is Travelodge, which is utilizing our test and learn capabilities to support optimization of new investments in their business. And third, our services can be deployed to support new networks, making our open banking and digital identity propositions even stronger. With these adjacent networks, it's our services that will enable us to establish a differentiated position to scale and win. For example, we recently launched a new biometric checkout program. The program outlines a set of standards from banks, merchants, and tech providers, helping to ensure the security and privacy of personal data when people pay with a smile or with a wave. Now beyond expanding in payments and expanding in services, our third key strategic priority area is embracing new networks. As a reminder, our current focus is on two areas, open banking and digital identity. We're leveraging our Finicity and Aya acquisitions to extend our open banking footprint, grow our customer base, and deliver new solutions. This quarter, we expanded our Engage partner network to include our open banking services with new FinTech partnerships, including Douala, Synctera, I2C, and others. They can now use our open banking capabilities to easily build and implement solutions for their end customers across a range of use cases. from lending to payments to financial management. In addition, we recently launched a global start path open banking program. This program enables us to co-innovate with startup fintechs like DAPI, Financier, MMOB, Mono, and Paywallet, as we support their path to scale. We expanded our open banking product offering as well. We announced Pay by Link in Europe, which allows businesses to send payment requests through invoice, email, SMS, or social media chat. This can expedite the payment of invoices in a cost-efficient way, enabling both parties to better manage cash flows. Online accounting provider Visma Dinero is using pay-by-link to simplify invoice payments for over 75,000 small and medium-sized businesses. And in the digital identity space, Icarta continues its strong performance, signing over 200 new deals and expansions since we acquired the company just over one year ago. This includes many of the leading buy-now and crypto companies. It also includes real-time payment software providers like ACI Worldwide, who's leveraging Icarta's capabilities to help their global merchant network more accurately identify fraudulent transactions. Open banking and digital identity are attractive and growing opportunities, and MasterCard is uniquely positioned to be successful in both. So in summary, our business fundamentals remain strong. We delivered robust revenue and earnings growth again. We're executing against our strategic priorities in payments, services, and new networks. We have fortified our strong position with travel-oriented portfolios to capitalize on the continued recovery in travel. On a macroeconomic front, we continue to monitor a number of factors influencing economic and spending growth. And with all of that, we will continue to manage our expenses carefully. That said, we will also continue to invest in the business to drive top and bottom line growth over the longer term.