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Executives

Anthony Ryan – President & CEO

Pamela Patsley – Executive Chairman

Analysts

Robert Dodd - Morgan Keegan & Company

Adam Tuckman – GoldenTree Asset Management

John Williams - Macquarie Research

Craig Maurer - CLSA

MoneyGram International, Inc. (MGI) Q1 2009 Earnings Call May 7, 2009 5:00 PM ET

Operator

Good day everyone, welcome to the MoneyGram International first quarter 2009 earnings conference call. (Operator Instructions) Now it is my pleasure to turn the floor over to the Executive Chairman of MoneyGram International, Ms. Pamela Patsley; please go ahead.

Pamela Patsley

Thanks and good afternoon to everyone and welcome to our first quarter 2009 conference call. Also presenting today is Anthony Ryan, our President and Chief Operating Officer. If you have not yet seen our earnings release, you can find it on our website at www.MoneyGram.com.

I must remind you that today's call is being recorded and the various remarks we make about future expectations, our plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from expectations, plans and prospects contemplated in any forward-looking statements as a result of various factors including those discussed in our filings with the SEC. I encourage everybody to read our SEC filings, including our 10-Q for the period ended March 31, 2009 which we expect to be file with the SEC on May 11, 2009.

Additionally I want to note that today's remarks include certain non-GAAP financial measures including a presentation of EBITDA and adjusted EBITDA. Our earnings release includes a full reconciliation of these non-GAAP financial measures to the related GAAP financial measures.

Now with that out of the way, let me start by saying we are pleased with our performance in the quarter. We reported net income of $12 million and delivered growth in our core money transfer business during what continued to be a very challenging economic environment.

In 2009 we are focused on aggressively managing our balance sheet, making disciplined investments in global network expansion, and becoming more efficient to position the company for accelerated growth when the economy rebounds.

To that end I am pleased to report that today we initiated a payment of $70 million on our revolver, reducing our debt by 7% and saving annual interest expense of approximately $4 million. During the quarter money transfer including bill payment, transaction volume was up 4% and revenue was up 2% to $242 million from $237 million in the first quarter of 2008.

As we refine how we look at the numbers, we are providing a few new statistics today. Excluding bill payment, money transfer transaction volume was up 7% and money transfer revenue was up 3%. This difference between volume and revenue growth is the result of the decline in the euro and lower average principal per transaction as our consumers continue to adjust to the challenges of the current environment.

When we adjust for the impact of the euro, money transfer revenue excluding bill payment was up 6% in the quarter. As expected money transfer revenue growth slowed in the first quarter largely due to economic pressures in a few important markets. Spain in particular had a sizable impact on our results as it is our largest market in Europe based on transaction volume.

Spain has a high rate of unemployment as a result of a difficult real estate environment effecting many jobs filled by immigrant labor. International transactions for MoneyGram we define that as sends originating outside out North America grew 2%. Excluding Spain international transactions were up 12% reflecting continued growth in important markets around the globe.

We believe Spain’s impact on our growth rates will diminish as we continue to diversify our international portfolio thus reducing the unbalanced impact of any one country. And of course we will also be cycling against lower comparables in Q4 2009.

Total international transactions again, that’s sends originating outside of North America accounted for 21% of our volume in the quarter. Money transfer transactions originated in the United States and Canada grew 5% driven by continued expansion of our agent network and the success of our MoneyGram rewards loyalty program.

Excluding bill payment money transfer transaction volume originating in the US and Canada grew 11%. Bill payment transaction volume was down 3%. While bill payment volume overall has declined year over year there remains some bright spots.

Industries such as auto and mortgage held up well, while there were clear declines in the more discretionary verticals like telecom and satellite TV as our consumers continue to feel the impact of the economy.

We continue to look for bill payment partnerships such that we can leverage our 40,000 agent locations in the US. Transactions to Mexico were down 2% in the quarter. This performance was better then the market which according to Banco de Mexico was down more then 4% in the first quarter of 2009.

Our business in the Americas continued to be a source of strength and demonstrates the power of our business model as our market presence becomes more established. In 2009 we remain focused on executing against our four key strategies to drive long-term profitable global growth.

These strategies are to expand our distribution, provide worldwide consumers with a superior value, deliver a low cost service platform to agents and consumers, and drive product innovation. I’ll take a few minutes to highlight how we’ve expanded our distribution network during the quarter, and then Anthony is going to provide an update on our progress against the other three strategies.

We continue to grow our global footprint. During the quarter we expanded our worldwide agent network by more then 18%. We doubled our locations in eastern Europe, we grew our presence in India nearly 50%, and significantly increased our network in Asia Pacific and Africa on a year over year basis.

Our worldwide agent network now stands at 180,000 locations in 190 countries and territories around the world. We continue to strengthen our distribution by maximizing existing relationships within our premier global agent network.

We’re pleased with the rollouts of a number of important customers in North America. First we’re on track to complete the implementation of an additional 2,000 Canada Post locations in June, which greatly increases our network in Canada.

In the US we’re pleased with the ramp up of transactions in the CVS locations and we continue to see month on month growth. Wal-Mart continues to roll out its dedicated money centers and we’re excited about this and to be a part of this continued expansion as the money centers generate high productivity for our products.

We also completed a number of significant agent renewals in the quarter. In the Middle East we resigned Capital Bank in Jordan, and [Al Miwaber] Bank in Lebanon to multi year agreements. In Nigeria we renewed UBA, an agent with 700 locations, in Senegal we renewed our agreement with CNCAS, and moving on to southeast Asia, in the important market of Indonesia, we extended our contract with our top agent, CINB [Niaga] Bank.

We expanded our distribution in high potential emerging markets by adding new agents. During the quarter we made significant progress in the world’s top three received markets. First in India, Punjab National Bank, the country’s second largest national bank with 4,600 locations and Allahabad Bank with more then 1,300 locations will begin offering our services through an agreement with our super agent, UAE Exchange and Financial Services.

These two relationships will bring us to the 20,000 location mark in India. Last week in China we announced a key win with Bank of China that will initially bring MoneyGram services to 200 branch locations in Beijing. During the quarter we signed and launched M. Lhuillier in the Philippines, adding nearly 1,200 agent locations to that key market.

In addition we continue to make progress in other regions such as Africa, where we added 475 locations in three countries, Kenya, Ethiopia, and Angola. In Europe we’re focused on the November implementation of the European union payment services directive, known as PSD. We believe the directive presents significant opportunities to expand our network by opening up new classes of trade that will build on our existing base of licensed agent and company owned stores.

Our sales and integration teams have been working to ensure that we’re prepared to capitalize on the opportunities presented by this new regulatory regime. Another part of expanding our distribution is to control our network in selected markets where it makes sense due to regulatory, competitive, or other factors.

During the quarter we added five highly productive stores in Paris through the acquisition of the assets of Raphael Bank in France. We now have 63 company owned stores in France and Germany and they continue to provide solid growth. During 2009 we’re focused on increasing productivity in existing locations and selectively adding stores near immigrant populations.

This is the complimentary strategy to our efforts with the EU directive and one we will continue to carefully consider as more opportunities in more markets become available to us through PSD. We completed the integration of our newly acquired super agents in Spain. All current locations were integrated into a common point of sale platform that provides greater efficiency and strengthens compliance and security.

We’ve also begun selling money transfer services directly to new independent agents adding 27 locations in Spain in the quarter. On the bill payment front we’re adding our utility bill pay services at Giant Eagle and Wegmans, two major regional supermarket chains in the northeast.

In addition to the utility bill payment service, both of these supermarket chains now provide the full suite of MoneyGram services including money transfer, urgent bill payment, and money orders. In summary despite the challenges in the global economy, MoneyGram continues to perform well as evidenced by our continued growth in the first quarter.

We remain confident in our ability to leverage our network, our brand, and our operating platform. We’re going to leverage this into profitable global growth driving margin expansion.

Now I’d like to turn the call over to Anthony.

Anthony Ryan

Thanks Pamela, Pamela highlighted how we’ve grown our distribution in the quarter and now I’d to walk you through our remaining three growth strategies. I’ll then wrap up with a brief discussion of our financials.

Our second strategy for pursuing profitable global growth is to provide our consumers with a superior value. Last week we launched a rollback pricing campaign in our Wal-Mart locations, promoting an $8.00 US to anywhere international send for amounts up to $200.00. The three month promotion spans the important Mother’s Day season.

Wal-Mart is supporting the promotion with a substantial radio marketing campaign which we expect will stimulate consumer awareness and lead to market share gains. Another way we provide value is through our successful MoneyGram rewards loyalty program which provides benefits to our most loyal customers with faster transactions and notification when funds are received by the beneficiary.

This program continues to exceed our expectations in terms of customer acquisition, and transaction usage and it remains a significant contributor to our domestic growth. About two thirds of the customers enrolling in the program and completing a transaction are not only new to the program but new to MoneyGram as well.

In June we will begin rolling out the program internationally starting with Germany and followed by launches in late summer to early fall in Italy, France, Spain, and Canada.

We also continue to provide consumers with superior value by offering local currency or a choice of currencies in 134 countries and territories. In the quarter we began paying out US dollars in the Philippines through our new agent M. Lhuillier. About 40% of the transactions are already being paid out in US dollars. And in Armenia we have seen tremendous growth in transaction volume after the launch of euro payout.

The third element in driving profitable global growth is our strategy to deliver a low cost service platform to our agents and consumers. We now have 35 agents across 21 countries using our delta works automated forms resulting in reduced transaction time and enhanced customer experience and cost savings.

During the quarter we rolled out our new retail point of sale platform called power transact, in France. This new platform has cut transaction time by a third and we plan to go live with the new system in other countries later in the year. We are also pursuing many other initiatives to improve our cost structure.

As an example, we recently implemented the first phase of money order imaging which will lead to a more efficient cost structure as we eliminate the physical handling of paper. Our final strategy in pursing profitable global growth is to drive product innovation.

On the send side of our transaction, our e-money transfer platform gives us access to a new category of customers with deeper banking relationships. On line money transfer and bill payment transactions increased 23% over the first quarter of last year and revenue was up 40%.

We are excited about our enhanced e-money transfer service which we plan to roll out later this year. The new platform will significantly improve customer usability and operating efficiency. In the quarter we entered agreements that highlight MoneyGram’s continued success in the important prepaid segment.

We can now load Visa ready link cards and NetSpend cards through our 40,000 MoneyGram express payment agent locations across the United States. In addition we are working with account now to launch a Visa branded prepaid card in select MoneyGram agent locations beginning in June.

These relationships expand our product offerings and broaden our presence in the key prepaid market. We also launched cash to card service in Morocco providing more choices for consumers on how they receive funds.

Morocco was one of North Africa’s leading receive markets and the cash card program is quickly gaining popularity especially with students and young people who prefer e-wallet transactions.

So you’ve heard some of the highlights from the quarter, now let me share some of the detail behind our financials. As you can see on the earnings tables, we have adjusted certain measures by excluding net securities gains and losses and severance related costs as we believe these adjusted measures provide information useful to you in understanding the underlying operations of the company.

Adjusted EBITDA was $66 million in the first quarter driven by continued growth in the money transfer and benefits of re pricing in our official check business. We continue to generate substantial cash flow allowing us to invest in our core money transfer and bill payment products while servicing our debt.

We reported net income of $12 million for the first quarter reflecting the ongoing strength of our core business. Fee and other revenue growth increased 2% over the first quarter of 2008 despite the weakened global economy.

Investment revenue was down 81% from $62 million in Q1 2008 to $12 million in Q1 2009, as a result of lower yields earned on the realigned investment portfolio and a substantial decrease in our investment balances primarily as a result of the planned departure of the top official check customers.

Investment commissions decreased $39 million or 99% due to the nearly $1.5 billion decline in official check balances and lower official check commission rates from the lower interest rate environment and our re pricing initiative.

Operating expenses increased 11% year over year in the quarter driven by $27 million in interest expense related to higher outstanding debt from the recapitalization. Excluding interest operating expenses declined by 3% due to disciplined expense management. We continue to be focused on gaining process efficiencies in areas such as the call center, our agent on-boarding process, network effectiveness, and in imaging our paper processing.

On a segment basis global funds transfer reported adjusted revenue of $260 million versus $263 million in the comparable period last year. We reported $37 million in operating income on an adjusted basis and an operating margin of 14%. Consistent with prior years our marketing spend will be heavier in the remaining quarters of the year as compared to Q1 2009.

Revenue and operating income reflect the increase in fee and other revenue from the growth in the money transfer business offset by a decrease in the investment revenue compared to the prior year. In the payment system segment we continued to see benefits from the restructuring of our official check business.

As a result of the re pricing initiative and exiting several large customer relationships we continued to generate profit and improve margins on an adjusted basis. Although revenue is being effected by lower balances, lower return on investments, which we expect to continue.

The segment reported first quarter operating income of $7.3 million. Moving on to the balance sheet at March 31, about 99% of the portfolio was in cash and cash equivalents and government agency securities. Our assets available to cover payment service obligations at the end of the quarter stood at $5.5 billion and our payment service obligations were $5.1 billion, leaving our unrestricted asset position at a healthy $421 million, up from $391 million as of December 31, 2008.

And again as Pamela mentioned we are happy to report that we initiated a payment, the excess cash balance to pay down $70 million on our revolver. To wrap up the financials let me make a few comments about expectations for 2009.

While we expect money transfer to continue to grow we expect it will be at a slower rate then what we have experienced historically as a result of the global economic slowdown. Investment revenue is expected to continue to decline on a year over year basis in both segments with the change in our investment strategy, lower interest rates, and declining balances.

We currently expect to continue to pay cash interest on the subordinated notes and accrue or pay in kind the dividends on our Series B preferred stock. In summary MoneyGram turned in a solid first quarter performance driven by continued growth in our core money transfer business.

In 2009 we will continue to build on our momentum, improve profitability, seize opportunities to increase our distribution, and generate cash flow to invest in the $400 billion global money transfer opportunity.

Now I’d like to turn it back over to Pamela for closing remarks.

Pamela Patsley

Thanks Anthony, we are excited and confident about the possibilities ahead for MoneyGram. I believe we have a clear focus on growing our market share through strategic sales initiatives and their quarter development, through extension of our brand to new categories of customers, through product innovation and service enhancements, and inherent in each of three things we must offer a compelling value to our consumers around the world.

Anthony mentioned we’re undertaking a rigorous initiative to streamline our processes and become more efficient and we remain disciplined in our deployment of capital as we seek to create long-term shareholder value.

So, again thank you for your time today, and we’re going to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Robert Dodd - Morgan Keegan & Company

Robert Dodd - Morgan Keegan & Company

On the pricing initiative with Wal-Mart, an $8.00 fee, I’m just thinking back in the past on pricing there’s been some flexibility and some ability to get back pricing when you’ve cut on the FX side, but generally speaking I don’t recall you or frankly any competitors managing to get pricing back up after cutting the headline fee. How confident are you that you’re going to be able to get it, to raise that price again after the promotional period and get the consumer and the market share to stick.

Anthony Ryan

This promotional period is for 90 days and we worked with Wal-Mart to encompass the Mother’s Day period and that’s why we’re also focused on the US to anywhere international segment as part of this promotion and at the end of the 90 days that pricing expires.

At that point we’ll be able to fully evaluate the impact of this and of course we’re doing this to increase the consumer awareness and try to increase our market share at the same time.

Robert Dodd - Morgan Keegan & Company

On PSD, I know you’ve continued to kind of expand the owned locations, what kind of thought have you given into maybe holding off on that. Obviously they cost money up front ultimately the returns might be better, but with PSD coming and potentially opening the agent channel much wider in those markets, what thought have you given to holding back on expanding owned to go for the more variable cost agent model a little later down the road.

Anthony Ryan

We look at payment services first as an opportunity that opens up the different classes of trade and we’ll be evaluating both our company owned store strategy as well as the agent model that we traditionally had. Having said that we’re pleased with the operating performance of the company owned stores. They’ve done very well and we can generate a lot of volume in concentrated ethnic areas by opening up those store locations.

So we’ll take a very disciplined approach and we’re looking for a balanced solution to drive profitability through both strategies.

Operator

Your next question comes from the line of Adam Tuckman – GoldenTree Asset Management

Adam Tuckman – GoldenTree Asset Management

I was just wondering if you could comment on the first quarter operating margin on the transfer segment. It picked up pretty materially from the fourth quarter and just wondering if this is a pretty good run rate to assume for the rest of the year or if there was something seasonal in there and it might revert back to what we saw in the fourth quarter, kind of closer to 10%.

Anthony Ryan

As you know from our past record here the marketing expenditures tend to be higher in the back half of the year for us and in particular in the fourth quarter. So when we’re looking at the timing of marketing expenditures as I said in the prepared remarks our Q1 marketing expenditures are lower and we expect that to pick up for the balance of the year. So that would be one of the big drivers of that.

Operator

Your next question comes from the line of John Williams - Macquarie Research

John Williams - Macquarie Research

Looking at the first quarter investment revenue line, there’s a pretty substantial fall off from the fourth quarter, I know a lot has to do with the rates available in the market but I guess what really made up the big difference I guess from 4Q to 1Q.

Anthony Ryan

The rate was down, our investment revenue was down because the Fed funds environment number one, and then also it takes some time for investments to reset as well and there’s a bit of a lag on that so both of those factor in and you see the effect of that then in our Q1 number.

John Williams - Macquarie Research

So historically you’ve been more in like the 200, 300 basis point range, is it fair to expect this should be a decent run rate for you going forward, what you saw in the first quarter.

Anthony Ryan

Yes.

Operator

Your next question comes from the line of Craig Maurer - CLSA

Craig Maurer - CLSA

Just wanted to ask a question on the competitive dynamic, Western Union continues to talk about taking contracts from their largest competitor, and I was wondering if you could comment on how you’ve had to price your new contracts to fend off competition and general pricing in winning new business.

Pamela Patsley

I guess I would like to just make one overall comment that in the big scheme of things we like competition. I think competition keeps all of us sharp and I would suspect you hear that same thing from Western Union.

So I’m not sure there is a specific formula that we can apply but I think it is very competitive. We evaluate each as its fitting into our overall growth strategy. What it brings to us, what products we can drive through that and of course then the pricing dynamics and without calling out names, there are puts and takes particularly some of the names that we went through in our script here, that went the other way.

Craig Maurer - CLSA

I guess another way to ask that would be if you were, I guess I want to get at that from another direction. If you were to look at your pricing capabilities to get, to win new business versus two years ago or two, three years ago, before the strife that the company, how badly has your ability to price been impacted.

Pamela Patsley

I think, I’m not sure that recapitalization event is manifesting itself in our pricing strategy. We’re here to create long-term shareholder value, focusing on expanding our distribution, and we very much have the support of our shareholders, and continuing to do the right thing to grow this business.

So I wouldn’t say you would, we see less flexibility at all in how we approach growth and pricing.

Anthony Ryan

And I’ll just add that I think our network growth speaks for itself, up 18% year on year, so I think we’re finding plenty of places to grow.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Anthony Ryan

Well we just want to thank you for joining us on the call and we look forward to giving you an update next quarter. Thank you and have a good evening.

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Source: MoneyGram International, Inc. Q1 2009 Earnings Call Transcript
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