Global Payments Inc. (GPN)

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Global Payments Inc. (GPN)

Investor Conference

January 17, 2013 8:30 am ET

Executives

Jane Elliott

Paul R. Garcia - Chairman and Chief Executive Officer

David E. Mangum - Chief Financial officer and Senior Executive Vice President

Guido Sacchi

Sid Singh

Jeffrey S. Sloan - President

Jay Rising

Jordan E. Cohen - President

Jane M. Forbes - Vice President of Investor Relations

Morgan M. Schuessler - President of International

Chris Davies

Joan Morla

Vladimir Komlev

James R. Hicks - President of Global Payments Asia Pacific

Analysts

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Glenn Fodor

David Togut - Evercore Partners Inc., Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Christopher Shutler - William Blair & Company L.L.C., Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Jane Elliott

Good morning. Welcome to Global Payments' Investor Conference. I'm Jane Elliott, and I want to thank all of you for being here today. And I also want to note on -- for all of you here, we also have a webcast. And so, thanks to all of you online.

A couple of housekeeping items before I introduce Paul Garcia. Our Safe Harbor provision is in the books in front of you. Each of you have a copy of all of the slides, including the Safe Harbor provision that's on the screen right now, which, members of our management team may make forward-looking statements today and those statements may contain risks and uncertainties, which are covered in our 10-K.

So with that, I will move on. A quick overview of our agenda in terms of housekeeping. We will have a break partway through. And I would like to point out that we have 2 panels today, one in North America and one in our international business. We will take a few questions from the floor after each panel and then there will be a general Q&A at the end. So if you just make your notes for later. And because it is webcast, we will have Heather Ross, who you probably saw when you came in through registration and Kay Sharpton, who was downstairs checking you in this morning. They each will have a mic for each side of the room since it is webcast [Operator Instructions].

With that, I'm going to introduce Paul Garcia, our Chairman and CEO. Paul?

Paul R. Garcia

Good morning, everyone. Jane, thanks so much. It's great to have you all here. So over the next 3 hours, you're going to hear from our executive management team with updates on capital deployment, technology, product and our market-by-market expansion plans. So David Mangum leads us off discussing the framework that will govern how we deploy capital, that will drive both growth and shareholder return. David will also provide details about our announcement this morning on our accelerated share repurchase, which he adroitly managed.

Next, we will hear a technology update from our CIO, Guido Sacchi. Guido joined us approximately 18 months ago and has brought a tremendous amount of talent to this crucial role. Guido has a PhD in engineering and did his postdoctoral work at MIT, but he has that rare ability to apply the most advanced, strategic thinking in practical ways, resulting in best-in-class technology platforms. Guido will share what we have built, how we intend to leverage this technology as a foundation of our partner-of-choice strategy.

After Guido, Sid Singh will present our product strategy. Sid is in charge of worldwide product, having run product for us in Asia. Sid will discuss how we are building our global product set, offering our customers the ability to accept all payments in any currency on all devices in all geographies. Sid will also discuss our mobile commerce strategy that includes pay app. Pay app is one of the ways we intend to serve the worldwide mobile commerce market and is currently in pilot in Hong Kong.

Jeff Sloan, our President, will follow and outline our plans to expand our North and South American businesses. Then Jeff will lead a panel featuring Jay Rising, our U.S. President; and Jordan Cohen, President of Canada, for a deeper dive into those markets.

At the conclusion of that, you'll have an opportunity to ask some questions of the panelists as well.

Something that will not be separately addressed today, yet remains an integral part of our growth strategy, is our business development function, which Jeff also leads. As you know, Global Payments has invested over $850 million in the last 3 years in M&A activities, and Jeff has added substantial human capital to that endeavor.

Mac Schuessler, President of International, will follow to discuss our international business and our strategy for both organic and inorganic expansion.

We are really proud of what we have built internationally. No one has the depth of coverage that Global Payments has. And I am convinced that under Mac's leadership, the best is yet to come.

Mac will then lead a panel comprised of Chris Davies, President of the U.K.; James Hicks, President of Asia-Pacific; Vladimir Komlev, President of Russia and Joan Morla, President of Comercia, which is our Spanish joint venture with la Caixa.

We will conclude with a general Q&A session. And hopefully, you'll find this to be a rewarding 3 hours.

Now, it's my pleasure to introduce David Mangum, our Senior Executive Vice President and CFO. David?

David E. Mangum

Thanks, Paul. Thanks, everyone, for joining us today. I appreciate it. It's nice to see so many familiar faces in the room again.

I'm going to walk through really a couple updates early and then talk about our capital strategy, capital plans; where and how we've been deploying capital, particularly since the last time we had this meeting, and where we'll continue to deploy it as we go forward. More specifically, we'll talk about the financial model itself, the deployment and the outlook for the company. It's all a setup for which you'll see coming forward. And we've been working hard with the plan for these 18 to 24 months to drive global distribution, improve technology, improve leverage, product and improve distribution. And that's really the theme for the day. All setup for how we make capital choices and how we expect to continue to make capital choices as we go forward.

But to start off, let's do a couple of quick updates. Two things; not just the share repurchase. A little incremental update to our commentary on the ROC process and PCI remediation from last week. We have now actually completed all of our remediation work. We were just shy of that, you recall, last week. It's been turned over to our qualified security assessor, who's in the midst of walking through and assessing those on the way to report a compliance. And we're at the moment now where the timing is out of our hands. We've done our work. And the assessor will assess, as they do, and then it will be turned over to the networks, each of which has its own process for assessing the ROC and then returning us the list of PCI-compliant companies. We do believe and continue to believe we are weeks away from returning to those lists. So incremental progress, just as we said last week.

Today's announcement is, we're serious about buying back stock. We executed an accelerated share repurchase just this week, shortly after the earnings. And what you can see there is a commitment on our part. Again, we mean business; we're intending to buy back stock. We believe we have the resources to continue to pursue the growth strategies we'll discuss today. Organic acquisition, all simultaneously committing to buying back stock. And that will be a key theme I'll walk through as we go through.

This is a pretty straightforward structure. $125 million commitment to buy back stock. We've taken delivery and retired shares representing 80% of that value, and we'll true all this up probably about the end of the May when the process completes itself. So more to come on that as we go forward, but a very straightforward structure and nice opportunity for a buyback for us right now.

With that, let's move on to the financial model and then we'll walk through the capital deployment strategy and all the other pieces.

There's a term on this slide called partner of choice. You're going to hear a lot of that today. We believe we already are the partner of choice. We've got a great business partnering and in wholesaling our product out to Isis here in the U.S., as well as our partners around the world. And when we talk about partner of choice, we mean merchants, we mean distribution partners, technology partners, networks, everyone. And these are the characteristics of an attractive partner of choice, hopefully the characteristics of an attractive investment for you guys as well as we walk through it. But these pieces are what really fuel Global Payments and its ability to grow. And we'll walk through all of those, but these inform a capital strategy that's highlighted by our desire and our plan to maintain an investment-grade profile. We do not have public debt, but we do maintain an investment-grade profile. It is the first hurdle to being a partner of choice for banks around the world, for key bank joint venture partners and it's a real hurdle. We've had overt conversations with our bank partners about this, our partners at CaxiaBank, our partners at HSBC as specific examples of that.

This has a target leverage of 2.5x EBITDA. As you guys know, we generate in the order of $0.5 billion of annualized EBITDA. Note that, that's the target. We can certainly go above that for the right transaction. We de-lever fairly quickly, as you know. So the target. This is not a hard cap and we'll walk-through what that means. You'll also see a little note there about fixed rate debt. You can expect us to see us to continue to try and actively manage the balance sheet and the cap structure as we go forward and as we mature, in this $2.5 billion Fortune 1000 company level.

Right now, we were, as of this morning's announcement, probably just a shade over 2x levered. As I said before, this target maximum is not a hard cap for the right deal, for the right transaction, for the right deployment of capital. We have every opportunity to go north of this and then de-lever and come back down. Again, on the order of $0.5 billion of annualized EBITDA. So about 2x levered for now.

Maybe what's more important and maybe more interesting, with a company that has generated on the order of $300 million or so of free cash, that liquidity allows us to have the confidence to believe we can execute on all these growth plans that we're going to discuss over the course of the day.

You can see the -- we got a close of the Asia-Pacific transaction. In the share repurchase, we still have well over $600 million of immediate access to liquidity for the right strategic opportunity.

That's all the setup for, really, the strategy. And for us, at our scale and with our reach, we believe we have the opportunity to execute all 3 of these at once; that is, as you well know exactly why, we executed some of the refinancing we did earlier this fiscal year on the way to being able to close over $600 million of acquisitions of APT, which Jeff will describe later and Jay will discuss, of the Asia transaction, which sets us up for long-term growth in Asia, while at the same investing on growth, organic growth, product delivery, product development, technology integration, digital commerce, while continuing to return cash to shareholders with a consistent dividend. And also, buybacks in a routine and regular basis.

So we'll drill down under each of those for a moment as we go through the rest of the day.

We have been very disciplined in our price acquisition. That's true since Paul spun the company a decade ago. We will continue to be.

These acquisitions, when we do look at them and pursue them, it starts with a sustainable competitive advantage and it goes through the rest of it. This is our filter. It's the exact filter -- those of you who met a couple of our directors earlier, it's the exact filter we review with the Board for each acquisition. It's been the filter that has to -- the deal has to pass this filter to get through management on the way to the Board, on the way to deploying substantial amounts of capital. And that sustainable competitive advantage can come from technology, from distribution, from the markets being served, any of those definitions. But then it has to hit these characteristics down below. These are the hurdles. Without quoting to you exactly what the hurdle rates are, these are the hurdles conceptually as they roll through any deal.

And I want to make a point here: We turn down far more deals than we execute. There are very few deals that happen in this space, in payments in general, where we don't get a look at that deal. I can tell you a couple of recent deals announced. We had every opportunity to take a look at them. And we may or may not have walked away, but we obviously did walk away at some point. So think about that whenever you see announcements and you're thinking about process and what the market's doing, what deals are out there. We stick to the filter. And if it doesn't hit these things, we're not going to do the deal. It doesn't matter what the rest of the marketing of that deal is. And again, we turned down a couple of recent deals with which you guys are familiar and we'll continue to stick to our knitting and to just do what we do well. In particular, focusing on the bottom one of these bullets, which is our ability to execute and drive real value and nail everything we promised to our Board and to you shareholders when we actually do a deal and we actually do deploy the capital.

On organic growth. I want to pull apart the pieces of our capital expenditures that really drive the organic growth and in particular, drive the investments that you'll hear Guido and Sid Singh discuss when we talk about the fundamental logical platforms we built and the product we're delivering to drive longer-term growth.

So here, you can see, in any typical year, we're spending a fair amount of capital on terminals. It's a pretty consistent amount. It's really a cost of doing business; it's a cost of sale and subcategorized as capital. In the lighter blue, you can see what's maintenance and enhancements. You're always refreshing your data, you're always doing something with servers; patching, et cetera. And then, as you guys well know, we've been through a long cycle of migrations. If you go all the way back to 2011 on the slide, you've got our United Kingdom back in migration. We all had long talks about that going back a couple of years ago, lots of migrations across Asia. And those are beginning to filter down to a very manageable level. As we sit here today, we are working on migrating our United Kingdom front end from a legacy HSBC platform to our own platform and we're working on remaining migrations into Asia, which is really our India migration, so down to a fairly manageable level. And you can see the shape of that piece of the bar chart shrinking.

And then on top of that, we've had initiatives. And as you well know -- we've talked about it a lot, we're coming through a serious bubble of capital initiatives. It started with our GSC in the early stages of this slide, morphed into the data center and technology strategy that Guido's going to discuss in detail in a few minutes. And it's been married to security since then.

All of which we believe, again, settles down -- and you can see a bit of, what I'm calling, a normalized view of CapEx, the organic CapEx required to keep running the business but keep investing the business and investing growth at the same time, and it settles into this $80 million to $90 million range. We'll always have initiatives but these outside initiatives, data centers and the security, all settling down a little bit. And on a normalized basis, $80 million to $90 million of CapEx is really a nice place to start. If you look at the percentage of revenue, the size and the manageability of that, again, to be able to do -- continue to do M&A, married to buyback, married to organic investment.

So in the area of returning capital to the shareholders, you should expect us to continue a consistent dividend, but you should not expect to see a change to that policy either direction. But you will see us continue to buy back stock.

A couple of notes. This is updated for today's announcement. So we don't have a free cash flow projection up there for '13, as you well know, but it looks like on the order of 40% or so, given what we bought back so far and what we're committing to buy. It looks a lot like 2012.

2011 is a bit of a down year on the chart, but it's a deceiving down year. The 2010 buyback actually happened and was completed in fully -- mostly executed, excuse me, in the month of May of 2010. For us, it's actually a 2011 buyback, the way we think about it. And here, you see again the maturing of the company from a capital strategy, capital structure perspective. Consistent buybacks, consistent commitment to buy back stock. There's a word on here, "committed to deploying a significant percent of free cash flow." It's a constant story; it's been on 3 different slides. We are committed to deploying a big piece of free cash flow annually for buybacks, and you saw evidence of that, obviously, this morning.

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