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MoneyGram International, Inc. (NASDAQ:MGI)

JPMorgan Global Technology, Media and Telecom Conference Call

May 14, 2013 2:10 pm ET

Executives

Pamela H. Patsley – Chairman and Chief Executive Officer

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

Analysts

Tien-tsin Huang – JPMorgan Securities LLC

Operator

Tien-tsin Huang – JPMorgan Securities LLC

My name is Tien-tsin Huang. I cover Computer Services & IT Consulting. And so, trying to advertise the iPad app again, please if you have questions, we can go through this as a question portal, I have this in front of me. So if you have any questions for this session or the future, please do say questions that way.

So next up the dial, we’ve got MoneyGram, it’s been a – the money transfer service provider, taking share in a lot of the core markets. Very happy to have Pam Patsley, Chairman and CEO of the company, also Alex Holmes, CFO is here. Same format, I’ll do fireside chat, and then definitely give the audience a chance to ask questions.

But maybe I’ll just kick it off, and just ask you the big inventory question about what you’re seeing on the ground in terms of macro trends. What’s strong, what’s weaker than expected? Then maybe we can dig into the business further from there.

Pamela H. Patsley

Sure, thanks, Tien-tsin and great to be with every one today. I think from the macro trend, we are generally encouraged by what we see, certainly not a decelerating economy anywhere, modestly improving in a lot of places. we’d say Europe is probably where we still see the most softness. Europe is weak from an employment and as we’ve talked a lot of people try and put, our associate money transfers successor volume with maybe construction start or different things like that, I think world over the best measure is really just employment. And so on that aspect, Europe remains weak. But the industry and the World Bank numbers are very good. They continue to project solid mid single-digit growth, 6%, 7%. MoneyGram has continued to outgrow almost, if not, always by 2x the industry. And so on all those aspects, we are very encouraged.

Tien-tsin Huang – JPMorgan Securities LLC

So who you’re taking share from to grow above market? You’ve been doing this obviously for sometime.

Pamela H. Patsley

Yeah.

Tien-tsin Huang – JPMorgan Securities LLC

I think your network has been expanding quite rapidly, but what would you rank in terms of the biggest factors for your share gains?

Pamela H. Patsley

Well, I always like to think it’s focused at the heart of it and good executions. But we are in an interesting and dynamic industry. So you start with an industry that’s growing mid single-digit and you start with the fact that MoneyGram is the second largest in the industry and yet has only 5% market share, and the largest has 15%. so between and one and two player, you are just right at 20%, 21%. We’re getting close to 6% at MoneyGram. So highly fragmented, lots of white space from informal channels, fragmented in terms of regionally niche players, very quarter specific, it might just be southern California to certain states of Mexico or a city in Mexico, just one region of Spain to maybe Ecuador, and then you have some regional players around the world and then banks. And I would say we are taking share from all the market also grows.

Tien-tsin Huang – JPMorgan Securities LLC

Right. So speaking about the market growth, in general, in the World Bank data that you threw out there, can you just quickly comment on migration trends, and I might get this question a lot, we’ve been in the industry a long time especially with the First Data when you have Western Union, we saw the growth in the double-digits comfortably, migration was very positive. Where are we now with migration trends, especially with this whole nationalism theme and austerity plans you mentioned in Europe, what’s going on now?

Pamela H. Patsley

I think you can have all those kind of policy discussions. I don’t know if you want to say they are in the periphery, they are in the background or whatever. But the facts are Europe, in particular, since you call that out, has an aging population, a very low birth rate. And to maintain their GDP, let alone grow it, they have to have a robust guest worker program. And what has really been fascinating about our industry, I love the inside glimpse we get and just how resilient our consumer is. As we all know, Spain has been suffering probably with leading edge of those in Europe with some of the worst unemployment.

And we have seen over the last few years where Spain to Romania three or four or five years ago was so robust, we are seeing a lot more Romania to Spain most interesting, so family member sending back home. We are seeing the Romanians move to Germany, to the UK. So our consumer moves around when it is incumbent on them to provide for work for their family and quite honestly we even see that in the U.S. families maybe not following the wage earner if they can get jobs in North or South Dakota or in Canada in the oil fields and they need send money home to the Midwest to wherever.

Tien-tsin Huang – JPMorgan Securities LLC

Right. That’s the beauty of the model right. And the consumers got to chase well and they’re going to utilize you to send that money back home. So…

Pamela H. Patsley

And it’s for essential need, for life needs, not just that next top-up of wealth, it’s for the basics.

Tien-tsin Huang – JPMorgan Securities LLC

Just sticking with Europe, I get this question around just regulations happening in Europe, I mean, at the PSD and there is a lot of focus on payments too right now. Is it a friendly environment for MoneyGram in your mind with Europe sort of cyclical issues aside?

Pamela H. Patsley

Yeah, cyclical and economic issues aside, from a regulatory environment, I would say all well and really not changed. There has not been any new regulation coming into Europe that we are dealing with at all.

Tien-tsin Huang – JPMorgan Securities LLC

Okay, good. Just staying closer to home, again, you get a good view there. What’s that your outlook short-term and long-term for U.S. domestic business. We think about it as sort of a single digit growth, should we think differently?

Pamela H. Patsley

I think the category can continue to expand. I’m not sure, we would want to be out there saying it’s a definite double-digit kind of category. But it’s a big business and growing 7% to 8% as we have in the last couple of quarters is – those are good results. And it is probably the most mature market that MoneyGram has been in that or the longest term in that U.S. to U.S. business.

Tien-tsin Huang – JPMorgan Securities LLC

Yeah.

Pamela H. Patsley

But we are seeing more utility for our service whether its bill pay, money transfer, money transfer for gifting services, payment for others bills and just again as folks in the U.S. move for employment.

Tien-tsin Huang – JPMorgan Securities LLC

So in the U.S., I mean, there is a lot of different products out there to serve I would say, U.S. into domestic business in general. So competitively, what you’re watching. I’m sure a lot of people have looked (inaudible) obviously I was get questions about PayPal and there is a lot of like alternative settlement networks that are out there. We have Fiserv earlier with Popmoney. Can you just comment on the landscape U.S. domestic, what you’re focusing on and what could be sort of impactful in terms of change?

Pamela H. Patsley

We continue to focus on a very – continuing to build and grow and get more productivity out of a very healthy agent base. So I think that is an underpinning, if you will, to our business in the U.S. And again, with the addition in the fourth quarter of Dollar General, so a whole new category for us, a different way to transact. We are focused on continuing to build out and maintain a very healthy agent base.

And then it’s about driving more product and ways to transact for our consumer through those agents whether it’s a self service model, cards on the “J” hook, kiosk model, things that work in partnership with our agents, if they are interested in reducing lines at the point of sale or teller time or anything like that. So I think its being responsive to our agents, responsive to our consumers. And then when you name some of these like PayPal or Popmoney CashEdge, we like their business and they are actually opportunities for MoneyGram both of which we have – actually the two you named, we’ve already announced doing business with in partnership because we have the compliance engine, we have the points of presence and the cash in and cash out aspect is what they are missing. And so I think there is around (inaudible) 1 plus 1 is 3 in some of these examples or scenarios perhaps, but it’s a very exciting, and I would say more complementary. That can keep growing you at a big question there, because you also mentioned Xoom, which I think, that’s a horse of a different color, but I’m really.

Tien-tsin Huang – JPMorgan Securities LLC

Maybe you can talk about an hour later, you bet, since you mentioned that’s sure, I mean digital channel.

Pamela H. Patsley

Oh, you mentioned it.

Tien-tsin Huang – JPMorgan Securities LLC

Yeah, I mentioned it, all right. People are feeding these ideas to look materially all day long. So let’s talk about it, I mean Xoom obviously has been an interesting model, had been growing very, very, rapidly. They’ve got this more bank account model. Obviously, with the ACH, etcetera; believe you offer ACH as an option at the Wal-Mart locations for example. So talk to us about how do you think you can leverage digital, and participate in that channel more aggressively?

Pamela H. Patsley

Yeah. So we actually think Xoom, and you may not hear this us from all of our competition or key competitor, but I believe, and I think MoneyGram as a team, we believe what Xoom has done. I mean they’ve been around 12 years. So they’re not just – they didn’t crop up out of nowhere. And so they’ve been at this for 12 years, and I think they’ve been in most respect. And importantly, a category expander for our industry.

I think they’ve attracted a different class of consumer, and I think all that’s positive. I think it had some positive benefits to us. I think if there’s any positive valuation transfer to us, and are very healthy online business. And we’re here to accept that from you all as well. And they do address a slightly different profile.

it’s a different service; I mean it’s not same day. It’s certainly not 10 minute. They don’t have U.S. to U.S., which is still a nice part of our U.S. to U.S. business, and of our online business. They say they’re in 30 countries, and I don’t dispute that, however I think they would admit, I don’t know if it’s 90% or 99% of their business is in three countries. We really are in a more robust way in a 198 countries, and we offer the debit and credit card and the ACH solution and where we offer the ACH solution along side dividend credit, it is selected by our consumer least frequently. Debit is the preponderance, credit next and ACH last. And I think there’s something to be said for also having an online model as we do that is profitable and is cash generative and not just cash out. So I think we have, I like our business, we had amazing growth for MoneyGram online. So 50% transactions and 23% revenue for the first quarter.

Tien-tsin Huang – JPMorgan Securities LLC

So to be clear, Pam, so your consumers aren’t opting for ACH, so that speaks to we’re being a different category, different user base?

Pamela H. Patsley

I think a little bit. now having said that, I think we want, I guess, I’d say where we start, where do we need to do to tweak our model, where we want to continue to roll it out, we have MoneyGram online offered in the UK and Germany now. We want to continue to expand other countries. So in just a zoom analysis, they are U.S. and only and missing one of the largest receipt markets, which is the U.S. We also have bill pay solutions online. We have the ability as we did with Wal-Mart to actually connect in Wal-Mart.com linked to MoneyGram.com and that is where you were referencing where set a long side zoom. And I would say we have more success with that model. We have an affiliate program with other of our large agents, whether it’s the ACE Cash Express or Supervalu with their site can popular over to MoneyGram. We want to continue to invest in a product; we have a mobilized web application if you will, but not a full mobile app. And I think so a mobile app is in our future, and I think continuing to improve on our ACH model, just to round out, it’s really more about having a fully rounded out and robust product offering.

Tien-tsin Huang – JPMorgan Securities LLC

It’s good. That’s helpful. So let’s talk about pricing quickly, I know there are different price points out there, different pricing models, Western Union is very openly talking about price cuts for a good chunk of their business. What is your pricing philosophy, you sort of held your own on pricing for sometime, it sounds like it’s not, what your competitors are doing is not really taking some share away from your business. So how elastic, inelastic is the business, and at what point do you leverage price to drive transaction growth?

Pamela H. Patsley

Okay, I’ll give you a little bit, then I’m going to let Alex our CFO add to this question as well. Our philosophy, I think the best is to take the example of what Western Union announced in November, and mostly for U.S. outbound, U.S. and Mexico, Latin America present very significant price decreases. We have not matched their price initiative in the U.S. except about three weeks after they announced that at the end of November, we matched it only with Wal-Mart as our agent.

And your follow-on question might be so, since then has Wal-Mart over indexed to the rest of your portfolio, and the answer is no. So we really are glad we didn’t overreact, we are glad we weren’t just “Oh my gosh!” but we were measured, and watched it, and we are very, very pleased with our results.

I don’t think you could look at our U.S. outbound business, then our U.S. to Mexico business for the first quarter and I hate to say come to any other conclusion about that. And so that is the approach we are taking. I would say that this quarter we are going to test some price initiatives from certain parts of Europe to certain parts of Africa and Asia just as a test. So I think the whole philosophy is this balanced approach of continuing to gain share, grow transactions and grow revenue profitably and so kind of putting that balance together is what we are focused off.

W. Alexander Holmes

Yeah, I think as you look around the world and look at the various countries in which we operate and the prices that we compete against, a lot of it is, more niche quarter we’re focused than really kind of global transfer focused. And so while Western Union does their thing, we have to be very cognizant of pricing at different levels, what countries people are sending to various FX rates, associated with that is currencies fluctuate, it makes a big difference in the lives of the consumers in terms of timing of sending transactions. And so it’s a pretty dynamic game that we play everyday looking at different agents, different cities, different corridors and balance that all together. So I think while Western Union has made some big moves and some large corridors that are easy to see U.S. to Latin America, U.S. to Mexico, outside of that everywhere else we’re playing, I think we’re doing really, really nice job, gaining share, growing our brand and really providing transparency to market in terms of who we are, what our value is to their consumer and how we can continue to grow. And I think there is something we’ve been putting together over the last three or four years and its paying off.

Tien-tsin Huang – JPMorgan Securities LLC

Sure, it sounds like it. So let me just dig deeper and just look at Mexico as a case study if that’s okay. I mean, you’re outperforming obviously Western Union and the Banco de Mexico data as well. What are you doing differently in Mexico, Wal-Mart has said, prices are – significantly lower like you said, but your agent base is also quite large there. So help us understand the dynamics of how sustainable the relative growth is for U-Verse industry in Mexico?

Pamela H. Patsley

Yep. I’m not sure when you say our price now with Western Union’s move except for Wal-Mart, our price is significantly higher. So it’s basically a $10 to $8 difference, and I get the percent, and all that, and some would say that’s important, but for those $2, if you think back to the money transfer industry, am I paying 30 or am I paying 20?

But $8 or $10 and might have it in pattern and where I go, and what’s convenient. Most importantly, what’s convenient from our receiver. And on that point, we have almost 16,000 locations in Mexico, and Western Union, I think is somewhere in the 8,000 to 9,000 or whatever.

So I think that definitely has been very additive. I think we have a very enthusiast agent base, both here and in Mexico, and we have a lot of agents that have really gotten behind the brand, and have been very active in our partner and promoting it. So we had just to make sure everyone in the room knows, U.S. to Mexico for the first quarter was 23% transaction growth for us. And I think Western Union talked about 9% on their Western Union brand, but overall, once you include Ov and Vigo for them, I think they were down 30 or something like that on transactions. And I would almost say that, that Banco de Mexico might artificially be low simple because of the Ov and Vigo and what they did to the market themselves.

Tien-tsin Huang – JPMorgan Securities LLC

Yeah, that makes sense. So just, I’ll open it up your comments just one last question, just thinking about how you answer that, how about commissions on the agent side with Western Union catching up in Mexico and some of the exclusivity ending with agents. What’s the trend on the commission rates?

Pamela H. Patsley

Yeah. I’m not sure what you mean Western Union catching up?

Tien-tsin Huang – JPMorgan Securities LLC

I’m sorry, just trying to build up their network.

Pamela H. Patsley

Yeah.

Tien-tsin Huang – JPMorgan Securities LLC

I apologize. They are trying to catch up with you in terms of number of agents?

Pamela H. Patsley

I actually think finally enough who would have thought we would be answering at this way years ago.

Tien-tsin Huang – JPMorgan Securities LLC

You have to wait on.

Pamela H. Patsley

I think exactly that the changing commission rate is more a negative to them than there is any negativity or positive to us. And again, it’s very hard to answer this, 198 countries and 16,000 corridors because pricing and everything depends on that, a wide variety of revenue per transaction by region in where it send. We have our sales force focused on trying to reduce commissions whenever possible. So we don’t feel under tremendous pressure for raising commissions. So I think its turning the tables, if you will. You might want to add to that from some of what you shared in the first quarter of our commission rate.

W. Alexander Holmes

Yeah, no I think globally commission rates have been relatively stable, they’ve ticked up a percent or so over the past year, but that’s larger due to a couple of large size agents and some contractual commitments that we made to them along with some opportunity to get some new agents and some markets but then we previously wouldn’t have had the opportunity to have. So those were intentionally and I think from the volume and the revenue aspect of those, it’s been a very positive move for us.

So I would say that commission percentage underlying that has been relatively flat and some markets continues to tick down a little bit. So competitively it’s about where it’s been for us on the face of income statement commission expense, it gets a little more expensive, because of this, money transfer is becoming a larger portion of our business, and has higher commission expense than the other products that we have today. but yeah, I think we feel really good about it.

Tien-tsin Huang – JPMorgan Securities LLC

All right, good. question from the audience, yep.

Question-and-Answer Session

Unidentified Analyst

(Inaudible)

W. Alexander Holmes

Can you repeat the question?

Pamela H. Patsley

Yeah. I need to repeat the question. I think, I’m supposed to tell you all, you’re supposed to use the microphone, that guy back there is yelling at me. So the question is, do we really think long-term that people like or entities like PayPal or Fiserv, Popmoney or competitors or customer, vendor/customer partnership or at some point does that dynamic change?

Unidentified Analyst

Okay. And then how does the partnership work today?

Pamela H. Patsley

Okay. And how does the partnership work today? So I would say, the things that we have the neither have those entities have, I think remain in place. I don’t see, I think they’re kind of on record; they don’t want their own bricks and mortar. So I think the points of presence globally, they’re licensed in as a financial service provider, regulated in 198 growing countries is not really something that either of them are looking to do, particularly not, Popmoney given that’s just really a U.S. product today.

And I think the compliance engine and all those sorts of things again, taken investment that I’m not sure they’re going to do. Never say never, but we really like our partnership. We are on target for this quarter to launch the first two initiatives with PayPal, and we’ve been working with Popmoney and CashEdge for a long time. I think after their acquisition by Fiserv, some of the integration and product development took a little bit of a pause on their side. So that’s reinvigorated now, and I think they see the value of our network and our brand for that cash in, cash out and the ability to reach a whole new consumer base for their products. So we’re very encouraged by it.

Tien-tsin Huang – JPMorgan Securities LLC

(Inaudible) Thank you.

Unidentified Analyst

Do you view the moves by Western Union is directly targeting you guys?

Pamela H. Patsley

I am not sure how to view those moves. I’ve heard anecdotally folks say. I don’t know (inaudible) and we know a lot of people that work there, they’re seemed to be afraid of their own shadow. and I think we are a leader now. I think oddly, MoneyGram is taking a leadership role and leadership doesn’t always mean the largest, but I think MoneyGram has taken a leadership role in the industry on many fronts. And I don’t mean to – I mean they’re a great company, they’ve been around the long time and a very strong brand and I hopefully get it all figured out.

Unidentified Analyst

I guess this is a follow-on to that, I want to marry that with earlier you’re talking about how the market is so fragmented where they are 15% near 5, clearly you are a leader in this. But why would they be turning their attention to the company with 5% market share when there is another 80% to go after.

Pamela H. Patsley

Well, I’ve got to believe, they’ve recognized that, I mean they’re very smart people there, and I don’t really think they believe it’s zero sum gain. in other words, we have to lose for them to win. They just can’t possibly believe that, because of the disparity of the market, and how fragmented it is and how large it is.

And so there’s share to be gained from everyone. So I don’t know if that’s kind of maybe motivational for their folks or whatever, and I’m not really sure I know that they’re necessarily targeted at us. So…

W. Alexander Holmes

Anyone else, please step up? We can ask question on Thursday, by the way to presume in here.

Pamela H. Patsley

No. There you go.

Unidentified Analyst

I just have a question about mobile, and how that affects you, and unlike MTS, and all those sorts of networks. Could you talk about that?

Pamela H. Patsley

Sure. We think mobile is largely an opportunity, and I’m going to, Alex has worked very closely. Prior to him being the CFO, he worked very directly with a number of these initiatives to give you some more color. But I would say, from my perspective again, the mobile operators, and whether it’s handset, mobile operator, any of them, they are not building out the infrastructure that it takes to manage, and be compliant and have the points of presence for the utility, a cross-border remittance on a mobile phone. So again, we have the unique assets and core competencies, and sit in a great place. And for some specifics…

Unidentified Analyst

That’s great perspective, and just to add a little clarity, some color to it. I think as you look at where we had some opportunity to do some partnerships in the mobile space, I think you look at a good area of interest would be Qatar. so we’re partnering there with Qtel, which is really branded as Ooredoo now. But Qtel started, they basically are the dominant telco in Qatar. They started a mobile wallet, they branded it. And then they are looking for utility for that wallet. So wallet has a lot of capabilities and can do various activities. Money transfers for Qatar is a very important product and they didn’t have that product and so they’ve added MoneyGram to provide that service.

Consumer can still use the Qtel mobile wallet for a variety of other activities but for that product set. And so I think we are finding that rather than looking at some of these opportunities as potentially disintermediating for us. They’re actually coming to us and saying we like that product, we recognized consumers want that and so they want to add that to the wallet. We have just launched a partnership in the UK with Lebara, which is one of the largest telco there as well and particularly focused on the migrant population and the same thing, they’ve build a web application that allows money transfers to be sent to the mobile phone alone using MoneyGram.

And again I think it’s a testament to the value that we bring to them, we don’t want to have a mobile wallet, we don’t want to be a telco operator and so we want to do, we do really well which is process transactions and move money across boarder. Consumers are using these products and so a lot of these are designed to target kind of those more ethnic migrant communities, Lebara has got great brand name for that community. And so we are doing this in many markets and quarters we can. So I think very much like some of the PayPal examples, Ukash is another example in the UK where things that look potentially like competitive threats are actually proving to be opportunities for both companies to get together and actually provide a better service to the consumer.

Tien-tsin Huang – JPMorgan Securities LLC

Time for one more question. If not, I have one more, can’t let you go without asking a regulation question I guess. So immigration reform, potential impact on MoneyGram if any, what your thoughts there and then of course anything new with corporate monitor, Dodd–Frank regulation in general.

Pamela H. Patsley

I think it was a basket question?

Tien-tsin Huang – JPMorgan Securities LLC

38 seconds.

Pamela H. Patsley

Okay, here we go. Dodd-Frank, so probably the easiest one to answer, it’s effective October 28, this is the revised rule, the rule removed a lot of the disclosures that the initial rule had in place, we are ready for it. Most of the expense for us for Dodd-Frank implementation was in 2012, we will still have some, it’s not going to be a big number. And we’re well in hand on that.

Monitor, we have our monitor in place, it is very prescriptive what they have to do in terms of designing a work plan by exit date, company reviews, back and forth to DOJ, they do their work, report to company, report to DOJ, and they’re first of – they require to give an annual report, their first annual report will be due this fall.

We find them to be professionals, they are all lawyers with I guess one of the echelon of law firms I guess Freshfield. So I think we’re finding that to not have any negatives at this point. What was the other one?

Tien-tsin Huang – JPMorgan Securities LLC

Immigration reform.

Pamela H. Patsley

Oh, immigration reform. Hey, we think, again a little bit policy aside, what’s good for the U.S. economy, what’s good for any economy is good for MoneyGram. And I think, we believe kind of settling this issue, and having something that articulate, and a good plan is good for the U.S., there go, good for MoneyGram.

Tien-tsin Huang – JPMorgan Securities LLC

All right, good stuff. I think we’re at the end here. I appreciate you being here again as always. And I think, if you guys have questions, please come up.

Pamela H. Patsley

Great. Thank you.

W. Alexander Holmes

Thank you.

Tien-tsin Huang – JPMorgan Securities LLC

Thank you.

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