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W. Alexander Holmes - Executive Vice President and Chief Financial Officer

Analysts

Georgios Mihalos - Credit Suisse

MoneyGram International, Inc (MGI) Credit Suisse Global Services Conference Call March 11, 2013 11:30 PM ET

Georgios Mihalos - Credit Suisse

Okay great, so I think we are ready to begin. My name is George Mihalos, I cover Services stocks here at Credit Suisse. Want to welcome you all to the 15th Annual Credit Suisse Services Conference. Thank you for being here, and we are going to kick off today's event on the processor side with MoneyGram. I have with me, CFO, Alex Holmes. Alex, thank you for being here.

W. Alexander Holmes

Absolutely.

Georgios Mihalos - Credit Suisse

So, I wanted to start off with the growth profile for MoneyGram. Clearly, your money transfer growth is outpacing the overall industry, somewhere 13% to 14%. Maybe kind of talk about, walk us through some of the factors that are driving that outsized growth, relative to the competition in the industry?

W. Alexander Holmes

Sure, absolutely. Thank you and thank you all for being here, the early morning slot as always, an entertaining one. So, certainly happy to do it. I think you know, if you look back at MoneyGram, we are a very different company today than we were 3.5, four years ago. We are focused, basically, 100% on growing the global money transfer business, and supporting that with some ancillary products in terms of bill pay, money orders and these sorts of things.

As you look at our growth profile, we have been focused on double digit transaction growth, double digit revenue growth and double digit location growth, and I think we have been able to achieve those for the past couple of years. A lot of it has to do I think, number one, with kind of our refocus on the brand, investments in brand that we have been making over the past couple of years, really reinvigorating signage, marketing campaigns, refreshing the brand, focusing on consumer outreach. And then the second thing I think has been a little bit of our approach to the market, we have been going to the market with a very open attitude, a very, I would say friendly approach to what I would argue some people might call coopetition in terms of partnerships in the market, not being afraid to do things different and approaching the market with a very open attitude towards, and I think it has been paying back tremendously well.

Georgios Mihalos - Credit Suisse

How big of a factor has the shift in some quarters to non-exclusivity been for MoneyGram, and how do you think about that going forward? Is that going to continue to be a driver, or has that pretty much played out?

W. Alexander Holmes

No, I think -- you know, listen, I mean, I think if you look at the money transfer business today, or actually maybe more importantly, if you look at the state of the market from a remittance factor. In World Bank, something we track very carefully, estimates said over $550 billion were moved last year. An interesting corollary statistic is that, official estimates are that there was about $114 billion in aid moved to developing countries in 2012. Remittances from expatriate workers alone in 2012 exceeded $406 billion. So, I think when you step back and take a look at the market dynamics that are helping drive some of the growth and sort of the systemic movement around the world of money, I think it leads a lot to that direction, and to kind of how things are playing out a little bit, as you look at growth and development statistics.

And I think, even if economies have slowed and people have -- governments and others have slowed that funding, actually the remittance business has been accelerating since 2009, much I think has led to a lot of that tieback. Specific to your question, you know, I think it's a little bit of everything.

Georgios Mihalos - Credit Suisse

Got you, that's helpful. Maybe, just kind of moving on to pricing, which is one of the focal areas for the industry. Obviously, your largest competitor made some news a couple of months ago, passing through some higher price adjustments for 2013. I think you guys on your last earnings call mentioned you are observing the environment, you want to see what happens with your volumes, and then you will make a decision whether or not you will somewhat match the lower pricing. Any update you can provide to us there, how does it look?

W. Alexander Holmes

Yeah, I mean, first of all, I think you know, our approach to pricing has been one of extreme focus on revenue. I mean, obviously we want to generate transaction growth; but there certainly has to be revenue and profitability associated with their growth. I think there is a bit of a misnomer that, at least one of our competitors like to say they make investments in pricing. I don't really understand how that can be viewed as an investment per se, as much as it's reduction in price to remain competitive.

So I think from where we have been, we took an approach to the market many years ago. Probably back as far as '03, '04, that we were going to be kind of the value player in the market, and that lined up pretty well at the time, with a new super large agent of ours at the time, which was Walmart, and I think it sort of played through kind of the focus of the company over the past five years, just in terms of paying a little bit higher commission to the agent, little bit lower fee to the consumer, finding our niche in there, finding agents who are able to play through, and take a chance with MoneyGram many years ago, and I think it has played out to today's performance.

So if you look at the ability of MoneyGram to sustain that kind of return to focus on help some of that growth, I think that you know, as it kind of comes through, I think you are going to kind of see it play in a couple of different ways.

I want to go back for one second on your question on the -- because I think it affected us a little bit. I want to go back to your question on non-exclusivity, because I think there is a bit of a -- when you look at market trends, because it comes to pricing as well. You know, many years ago, you go way back, 20-30 years, there was kind of just one major player in the space. So I think as you look at that, exclusive contracts are really important, super agents in different markets, large agents, post offices were fairly important, and you could charge a lot of money for that service.

I think when you look at our approach from a value perspective, we have taken a slightly different approach to that. So I think prices have come down in the industry, but I think as you look at even smaller niche players who came in at a lower price point, I think we are kind of coming to a bit of a means in the marketplace, and so some of that leads to the breakdown of exclusivity, some of that leads to increased competition. But I think that's all good for the industry and all good for the business, which I think has a bit of a different twist to it if you look back several years.

So from a pricing perspective, I think for the first time in many markets, particularly, the US to Latin America, the US to Mexico in particular, for their lower banded prices in kind of that $300 range, I think we are premium priced in some of those markets. But the market is made up of a couple of different things, and so again to your exclusivity question, when you look at some of the big agents, exclusivity is still fairly prevalent, except on the receive side where I think there has been number one some agents were looking for more volume, and then there is government demands to reduce exclusivity, just to get more free flow money coming in again, back to the example on the World Bank, and expatriate remittances.

When you look at kind of the small mom and pops, we are really competing in the US, for example, we have 14,000 independent agents, who are your local bodegas or your ethnic specific shops, and that market has always been kind of a non-exclusive market, where you are competing daily, and you are not only competing for the consumer, but you are competing for the agent, because the agent has a lot to say in terms of who does that remittance; and so, having good relationship there, focusing on that value proposition to the agent, as well as to the consumer, makes a big difference, and I think that non-exclusivity has been there, and that's an area where we didn't change price in particular, and I think the industry is at a higher price point than what we've seen our largest competitor do. I think the growth in those markets has sustained, and continues to grow.

So I think it's a bit of a new position for us, but as we talked about on our fourth quarter call, we haven't really seen an impact on the pricing and so, we are pleased with where we are.

Georgios Mihalos - Credit Suisse

So you are still evaluating that decision?

W. Alexander Holmes

Yeah. I mean, we made some changes in the online space probably last summer. We did adjust our prices in November at Walmart, obviously for almost a different competitive reason, to align with Walmart's philosophy for certain, and in those other markets, we've sustained that growth and have kept things going. So, been good.

Georgios Mihalos - Credit Suisse

And it kind of sounds as you think about pricing longer term going forward, future years. You sort of think it will be, in that, let's call it the normalized 1% or 3% of revenue band, is that how you are thinking about it going forward?

W. Alexander Holmes

Yeah, certainly how we are thinking about it. You always -- listen, when you are losing volume or the market dynamics shift a little bit, it's important to adjust your prices to remain competitive. So I can't fault any industry or any company for doing that. I think doing it for a lack of any other opportunity I think is not quite the right way to do it, so we are looking at maximizing revenues. So, there is a couple of places where we have seen in the past, someone changes a price, we have seen a little bit of degradation and transaction. But you run out the business case in terms of changing the price, and what will that do to your -- and if it doesn't pay back, you don't do it. That's business.

Georgios Mihalos - Credit Suisse

Got you. So, obviously the online channel, there has been a lot of focus these days.

W. Alexander Holmes

Absolutely.

Georgios Mihalos - Credit Suisse

I think it's about 5% of your revenue, if I am not mistaken, it's growing fast, and it's predominantly card based for MoneyGram debit and credit card? Going forward, do you see yourselves rolling out a same day ACH product?

W. Alexander Holmes

Yeah, a few points on that, because I think it's a really exciting time in -- rather than online though, and what we call kind of alternative channels, and so our total alternative channel business, which we really make up online, but also mobile transfers, also kiosks and ATM transfers, and then you have your account to account and cash to account base transfers, and that is about 5% of our revenues today. Again, going back to our core cash to cash business, I really can't emphasize enough, the value of the 310,000 agent network around the world, the importance cash plays in the lives of most of our, not just the senders, but the receivers in particular, I think something like 80% of all transactions are still done in cash around the world, and while that's coming down, it's certainly not going away for a very long time.

But to bolster that, we found partnering with our agents and also a bit on our own that going into some of the alternative channels, consumers are receptive to it. Particularly on the send side, you are seeing people willing to send money from bank accounts. You are seeing people utilizing ATMs and kiosks to send money, accessing accounts using their mobile phones.

On the receive side, you see it in some areas, I think certainly send into an account is very prevalent on the receive side. In some payouts -- on ATMs and kiosks and these sorts of things, but otherwise cash is still very prevalent, either cash or bank accounts for the most part on the receive side.

I'd say our business continues to grow. We are moving upstream from just cash-to-cash and into these alternative channels. Again, a lot of it with our agent partners today, which is great. It shows sort of their commitment to doing the business in a couple of different ways.

I think as you look at our online business alone today, it is largely credit and debit based, and it's also largely cash payout. We do some business to account based transfers in places like the Philippines, in places like Mexico. I think today we are probably largely under indexed in a country like India, and I think -- but if you took those three, it's probably the bulk of the markets that's doing really large-based, account based transfers today.

We offer an ACH product that's largely never been accepted by our consumer base. Clearly, the success of some other online customers says that there is a different consumer demographic out there, a different consumer perhaps and an opportunity for us to (inaudible) our business a little bit differently going forward. It's not something we have ever really as a company spend a lot of time or focus on. Clearly, it works for others. There are some trade-offs to it though, it tends to be at a very low price point, tends to be a lot of FX management associated with that, and not that we don't do a lot of FX management today, but clearly changing FX prices on the fly, and keeping prices low, obviously has a lot of inherent -- I don't want to say risks necessarily, but skillsets that maybe are not necessarily completely core towhat we do today.

So it's an area that we think is, from an opportunity perspective, really exciting and something that we are going to be focusing more on going forward. I don't think anywhere within our business model, our plans for the future, do we think it's completely dependent upon that. Again, I think it's additive to what we do and something that we could certainly tap into in a broader way, if we can make it as profitable as the current business stands.

Georgios Mihalos - Credit Suisse

Great, that's helpful. Just two follow-up questions on the online side. One, the consumer that is using MoneyGram online, is that essentially a new consumer, or one that was previously going to an agent location, and then how do you think about potential channel conflict, between the brick and mortar agents, and online, longer term?

W. Alexander Holmes

Longer term I think is really-really hard to say. I mean, I think it's a factor of complete market dynamics. I think there is certain places today. If you just look broad-based like an Amazon and their success, and eBay, and their success in contracts that with the number of people still walking into brick and mortars today. I mean, I think it's a balance, and I think the money transfer industry will play out very similarly. I don't think that there is -- today, I think we look at the online customer, and I think they are probably 75%, if not more, may be even closer to 90%. Kind of a new customer, or someone who maybe has done one transfer in the store, and now is trying online.

So I don't necessarily view it as completely cannibalistic or really cannibalistic at all, I think its additive. I think if you look at the profile of our consumer, you are looking at someone who generationally, it varies, it could be here for a while, it could be a new migrant into the country that's hosting them. They are looking for work, they are getting paid, they are either getting paid in the bank account or they are being paid in cash, and then for the most part, they are remitting that money back home.

I think our consumer tends to index really heavily towards someone who is sending money for support, for other family members. Someone else, who is on the other end, who wants to pickup that money in cash and spend that money on basic living needs.

I think if you look at, there is other consumers obviously who are single, not supporting anyone, looking at saving money back in the bank account, want to keep that money there, maybe have a little more control over what they do with that money, or maybe they are sending the money home too, so they can return some day, and they want to save that money. I think that's a different consumer, than largely what we had in our business, and something again that we can probably move up in to.

So, I don't think they are necessarily mutually exclusive, nor do I think that, that there is any loss. If I look at for example today, where we have had tremendous success is Walmart.com. I don't think that has been any detriment at all to the walk-in business at Walmart.com, and I think it has been very additive and great.

Georgios Mihalos - Credit Suisse

Got you. Moving on to what has become a standard topic at all these events, regulation and compliance.

W. Alexander Holmes

Absolutely, yeah.

Georgios Mihalos - Credit Suisse

I think on the -- again in the last earnings call, you were in the process of, I believe finalizing a compliance monitor. Is that in place now, and maybe talk about what authorities the monitor has within MoneyGram?

W. Alexander Holmes

Sure. I think, just stepping back for a brief second, I think on the global regulatory scale, I think all businesses are probably under higher regulatory scrutiny than they have been in a very long time. I think the business environment is, from a government perspective, a bit unfriendly at the moment, particularly in the US and Western Europe. At the same time, I think Western Union had their issues in Arizona. We have obviously had some issues related to fraud back from an early period of time, almost kind of that same period of time. And I think we certainly have come a long way since then, I think that was recognized by the government, in terms of our settlement conditions, and then having the monitor come in, is someone that I think -- it can go two ways on you, certainly they can look at your business, look at what you are doing, and help you make decisions, in terms of whether that's the right thing to be doing. At the same time, I think it can be very positive, because it's someone, an individual who can help validate what you are doing, with those government bodies, and give you a little bit more, in some ways, prospected on whether you are doing the right things, and gives you a little buy in from the government, which we certainly hope we see.

I think the progress that we have made has been tremendous. I think that the importance of regulatory compliance going forward will continue to be an area of investment for us. I think it's just trade-off to areas of investment that you used to make, that you don't need to make anymore. You just spend a lot of money on paper and taxes and these sorts of things, that's all gone away, that will spend a lot more money on compliance as an example, and not that they are mutually exclusive any way at all, or complete trade-offs. But nevertheless, it's important.

Our monitor has not started yet. The government, we submitted three candidates, and they are supposed to select one, and let us know. They have not done that yet. We understand it's in the final stages of approval, but we haven't heard anything back. We are hoping that they will come in. We view our compliance program, all the things that we heard, from the government bodies that have been validated in terms of the progress we are making, the plans that we have going forward, and hopefully some of that will be able to get on board and support those.

From decision making outside of that, it's really, we submit data to them, on a regular basis. They review that data, and assuming that it complies with government laws and actions that we are supposed to be taking, which we should be doing anyway, you wouldn't foresee that the monitor would play some other role in terms of dictating a different direction. To the sense that we are not complying, and not doing things right, you'd expect them to tell us. So that's the case and that's it.

Georgios Mihalos - Credit Suisse

Okay. Why don't we pause there for a moment, to see if there are any questions in the audience?

Question-and-Answer Session

W. Alexander Holmes

I can't have everybody at once, you know.

Georgios Mihalos - Credit Suisse

Just to finish off the fascinating theme of compliance. Obviously again, Western Union has had some issues themselves with border. They have said that -- clearly the compliance monitor has impacted their business there. Why is your go-to-market strategy US to Mexico different than theirs and maybe talk about --

W. Alexander Holmes

I don't want to spend too much time on their issues, but I think there is a couple of important pieces in there. I think number one from our perspective, Mexico is an area we have been focused on for a number of years. I think, we have done very-very well in Mexico. We saw a slowdown in '07-'08, I think our slowdown came a little bit after the rest of the market. But I think we reaccelerated a little bit earlier than the rest of the market. I think our focus has been number one on compliance and changing out many of our agents in the US and the retail mom and pops, really, betting those through, what we call KYA, which is Know Your Agent process. Again that took place kind of back in 2009-2010, little bit in '08 as well. Obviously, coming out of the recap we went through, and kind of re-regulated ourselves, if you will.

In Mexico itself, I think we had a huge program in place to not only increase our agent locations in Mexico, but also the quality of those locations, the quality of the service in those locations, and on the signage we have. I think if you look today at our presence in Mexico, we have over 15,000 locations. It includes the addition last year of Electra, which is probably at least in my view of this industry, the premier new brand name in money transfers. In Mexico, it's a name Banco Azteca, and Electra is a name brand known by almost everyone in Mexico, it's extremely important. That has been an exclusive agent with Western Union for 10-15 years.

So at the same time that they faced their Southwest border compliance issues, they also lost that exclusivity on that agent. In Electra, they also lost on HSBC for another reason as well. So their agent network shrank, and I don't want to misquote, but I think it's down to 6,000 or 8,000 or something like that now.

In addition, one of the things that we were asked to do, which you will see, pretty prominently in the money transfer business going forward, is aggregation and aggregating basically global aggregation, in looking at where consumers have done transactions, not just from that point of sale, but from other areas as well. Aggregation across multiple brands is a difficult thing to implement, which I think led to some of their challenges on the [legal] side and some other places.

So, I am not sure that it's completely all compliance. I think there are some other factors there including kind of what Electra is doing there has made a difference. I think we are doing extremely well. Our growth rate is certainly bolstered by the addition of Electra, but it has been growing kind of high teens, prior to that, and I think is a testament to the job that the team has done, and so.

US and Mexico, extremely important corridors. Obviously, not from a revenue perspective, as profitable as it used to be, but certainly as prices have come down there from all the competition, I mean, I think there is 100 and something that are doing transfers to US to Mexico. They could be able, to be one of the leaders in that space today, and be doing as well as we are, I think is excellent.

Georgios Mihalos - Credit Suisse

That's helpful Alex. Maybe, can you just give us a sense? How important is a rebound in US housing, or how big of a contributor do you think that will be to your US to Mexico or maybe your US to US business?

W. Alexander Holmes

I think it's extremely important, but I think it's not just housing, I think it's any service industry, any service sector, even agriculture and natural resources drives a lot of migration employment, not just to the United States, but around the world. You look today at what we are seeing from growth in countries like Russia or Angola, a lot of that is driven by natural resources, obviously markets like Venezuela. These sorts of places are -- from now you see construction trend in Mexico. You see slowdowns in Spain, you see slowdowns in the Middle East which all kind of come back, but I think you see our consumers are (inaudible), if you take a Filipino for example, they are probably under indexed in construction, over indexed in the service sector, hotel, hospitality. So, all those factors are extremely important.

When you come back to the US, I think what we have seen, and I am trying to remember the exact statistic, but I believe migrants, unemployment, actually dropped about 1% from last January to this January, and so I think that's a positive trend. I think the Hispanic unemployment is relatively flat year-over-year as -- or at least flat to the broader trend, I mean, based on unemployment, but certainly we have seen a little bit on that migrant population side going down.

So, I think it is important, I think it helps. I think money transfer business can be a bit of a leading indicator for a lot of those sectors when you start to see money transfer business, swing one way or the other, it can be an indicator of what's going to happen in the market. But not necessarily complete. But yeah, certainly any employment helps, any GDP growth helps, and the friendlier the migrant, the immigration policies are the better it is for the business.

Georgios Mihalos - Credit Suisse

Got you. Well I think we are going to have to stop there, and I see we are running out of time. Alex, I want to thank you again so much for your time.

W. Alexander Holmes

Absolutely, that's great. Thank you very much. Thank you all.

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