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MoneyGram International (NASDAQ:MGI)

Q3 2009 Earnings Call

October 30, 2009 9:00 am ET

Executives

Alex Holmes – Senior Vice President, Investor Relations and Strategy

Pamela Patsley – Chairman, Chief Executive Officer

Jeffrey Woods – Executive Vice President, Chief Financial Officer

Analysts

[Kartik Mia – Northcoast Research]

Robert Napoli – Piper Jaffray

Joshua Elving – Feltl & Company

Robert Dodd – Morgan, Keegan & Company

Operator

Welcome to the MoneyGram International third quarter 2009 earnings conference call. (Operator Instructions) I is now my pleasure to turn the floor over to your host, Alex Holmes.

Alex Holmes

Good morning everyone. I’d like to welcome you all to our third quarter 2009 conference call. With me today are Pam Patsley, our Chairman and Chief Executive Officer along with Jeff Woods, Executive Vice President and Chief Financial Officer.

If you’ve 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 that various remarks we make about future expectations, 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 the 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 September 30, 2009 which is expected to be filed with the SEC on Monday, November 9, 2009.

Additionally, I would like 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 related GAAP financial measures.

This morning, Pam will take you through a summary of the quarter and Jeff will take you through a more detailed review of our financials. We will then have time at the end for your questions. With that, I’ll turn it over to Pam.

Pamela Patsley

Good morning. Thanks Alex. In the third quarter we made great progress on our expansion initiatives and on our efforts to actively manage our outstanding debt, and while our third quarter results were impacted by several items, we do not believe that these are reflective of the underlying strength of the business.

During the quarter we saw improved growth in our Money Transfer business, signed and renewed several key agents around the globe and implemented initiatives focused on reducing costs, streamlining processes and improving efficiencies.

In addition, during October, we repaid the remaining drawn balance on our revolver of $45 million. We have now paid $145 million over the last six months toward our outstanding debt obligation. This represents a 14.5% decrease in our total outstanding debt since May 7, 2009.

I’m confident that as a company we are energized and collectively taking the right steps to position MoneyGram for long term, profitable growth.

For the third quarter we reported adjusted EBITDA of $66.6 million and a net loss of $18.3 million. Both adjusted EBITDA and net loss were impacted by significant items in the quarter. Jeff will speak more in detail on these items later, but I would like to comment on two legal expense accruals in the quarter.

I’m sure most of you saw our release in October relating to our $18 million settlement with the Federal Trade Commission. This concludes the legal matter which we discussed with you in August where we recorded an accrual of $12 million in the second quarter. We added $6 million to that accrual in the third quarter. In total, these accruals of $18 million fully satisfied the monetary terms of the company’s settlement with the FTC which was finalized just two weeks ago.

While we don’t agree with the FTC’s allegations regarding our fraud prevention in the past, we remain committed to enhancing our already comprehensive efforts to combat consumer fraud.

Also during the quarter, we recorded an accrual of $16.5 million related to a jury verdict returned in a suit brought by Western Union involving certain patents. We were quite surprised by the outcome of this trial and we believed we were in a very strong position to obtain a favorable outcome.

However, we’re not done arguing our case, and post trial motions are pending, including motions for judgment in our favor, and for a new trial. We continue to evaluate next steps including possibly appealing if our post trial motions are not successful.

Turning now to our performance in the Money Transfer business, during the quarter, Money Transfer transaction volume excluding bill payment, increased 6% and revenue increased 3%. On a constant currency basis, revenue increased 5%. Including bill payment, Money Transfer transaction volume increased 4% and revenue increased 2%. Again, on a constant currency basis, revenue increased 4%.

The difference between volume and revenue growth is primarily related to currency valuation changes and a lower average base per transaction.

In the quarter, transactions originating outside of the U.S. and Canada increased 8%. Excluding Spain, transactions originating outside the U.S. and Canada increased 17%. As we’ve previously discussed, we expect to see the impact of Spain on our reported growth rate decrease as we enter the fourth quarter.

Additionally, we anticipate that Spain will account for a smaller portion of our business as we continue to grow and expand in other large send markets like Russia and Saudi Arabia. Transactions originating outside of the U.S. and Canada accounted for 22% of our volume in the quarter.

Looking at our EMEAAP business, that’s Europe, Middle East, Africa and Asia Pacific. The fastest growing regions during the quarter among those were South East and Central Africa, and Asia Pacific and South Asia regions, both of which grew at double digit rates. Growth in these regions during the quarter was helped by particularly strong growth in South Africa, Asia, India and Bangladesh.

France continued to perform positively on a transaction and revenue basis while our results in Greece were above expectations driven by transactions sent to receive markets in South Asia and the Balkan’s. Romania exceeded our goals during the quarter despite the country’s weak economic environment. Good growth in the key send quarters to Romania and the success of our new multi-trend offering in Romania were the drivers of this success.

Italy and the United Kingdom saw continued transaction growth driven largely by our key agents, the Italian Post Office and the U.K. Post Office, and despite the economic slowdown, the Middle East region showed robust growth for us, specifically in the UAE, Saudi Arabia and Lebanon.

Results in Asia Pacific were ahead of expectations. The Philippines volume continued its strong growth assisted by the introduction of dollar payout and the addition of our newly signed super agent. The Philippines continues to be an important receive country, and in October we lowered our fees and made a $30,000 donation to relief efforts in response to the horrific damage caused by the recent typhoon.

Turning to the Americas, Money Transfer transactions originating in the U.S. and Canada excluding bill payment increased a very healthy 9%. No doubt, we’d like to see a higher number here, but given the current market environment we like our position. Including bill payment, Money Transfer transactions in the U.S. and Canada grew 4%.

We look more broadly at our America’s business and to be clear, that’s North, Central, South America and the Caribbean, transactions to Mexico declined 10% during the quarter. While transactions to Mexico have declined this year, we continue to see exciting developments in other markets, specifically in Latin America. We see the region evolve from being not only a receive region, but also to a send region as well.

Outbound transactions from Latin America to the U.S., Jamaica and the Philippines all grew at double digit rates. While many of these quarters are growing off a small base, we still like what we’re seeing in terms of growth in these markets.

In Canada, through our growing relationship with the Canada Post, we saw excellent transaction growth to many parts of Asia and Africa. Within the U.S., transactions to Latin America, India and Haiti all beat our forecast.

Our intra-U.S. business had another very good quarter. Our online Money Transfer business brought double digit transaction growth in the quarter.

Now turning to the bill payment business, our express payment consumers continue to be impacted by weakness in the U.S. economy as well as year over year growth comparisons due to a previously reported exit of a large seller. Transactions for the third quarter were down 4%.

That said, we have a solid sales pipeline and are approaching each of the vertical bill payment markets such as pre-paid auto and collections with dedicated sales professionals that understand the requirements and unique needs of each of these key markets.

During the quarter, we signed several bill payment clients on our express payment expedited payment platform, including City Personal Loans, and City Mortgage. We also signed pre-paid card providers First Data, Medivon Pay and TX Via. We continue to remain positive about the outlook for this business.

With that, I’m going to turn the call over the Jeff for a few comments.

Jeffrey Woods

Good morning. Before I get into the financials, I’d like to touch on three additional business initiatives. First, I want to provide an update on our progress in preparing for a transition into a new regulatory framework in Europe as defined by the payment services directive.

As we previously discussed, PSD simplifies and harmonizes the licensing requirements in Europe allowing us to operate more seamlessly across 30 countries that are part of the European economic area. I’m pleased to announce that we recently received our payment institution license from the U.K. financial services authority that officially sanctions MoneyGram to provide payment services to consumers across Europe.

London will continue to serve as our immediate base of operations and the U.K. FSA will be our unified regulator on behalf of the E.U. As part of our compliance preparations, we upgraded our agent or KYA procedures in Europe and re-evaluated well over 1,000 of our agents across Europe as fit and proper.

Or in other words, we confirmed that they have the sound reputation, integrity and good standing with law enforcement and regulatory bodies required to service payments intermediaries for MoneyGram’s ultimate customers.

For MoneyGram, PSD opens up our options for European expansion by allowing us to pursue a greater range of go to market strategies. As a result, we are expanding our sales team in Europe to accelerate our footprint expansion in key countries. We’ve already signed letters of intent with four major retail chains in France and Germany.

Those are markets where we had previously only been able to grow by building our footprint of company and retail outlets. To sum up our PSD initiative, we are thoroughly prepared to the go live effect date of the Sunday, November 1, and look forward to providing progress updates on future calls.

Second, this quarter, we launched a cost and operational productivity review that encompasses a series of projects spanning across our company. These projects are focused on making improvements to our overall operating platform so it will serve as an enabler of growth as well as help us achieve best in class cost efficiency, quality control effectiveness and end to end cycle times inserting our agents and customers. We look forward to providing some color on our progress in future calls.

Third, I’ll touch on the pricing environment. Overall, pricing has been stable across markets for the quarter, but we continuously monitor the competitive environment at the quarter level, and are actively responding to market dynamics in a targeted and thoughtful way.

For example, Western Union lowered its pricing in the intra-U.S. market at the beginning of October. However, we have largely held our prices steady as we believe that our simplified pricing and strong agent network continues to be the value leader in the U.S.

Thus far, our intra-U.S. business continues to perform extremely well and transaction growth remains strong. Nonetheless, we expect the competitive environment to remain high and potentially intensify in various segments which is just one reason why we will continue to take appropriate actions to defend and grow our market position.

Turning now to the financials, as you can see on the earnings tables, we adjusted certain measures by excluding net securities gains and losses as well as other items. We believe that these adjusted measures provide information useful to you in understanding the underlying operation of the company and strength of the business.

With the release of our third quarter results, we expanded the items we’re including as adjustments for the purpose of defining adjusted EBITDA and adjusted net income. We previously only included items such as net securities gains and losses and derivative items related to our legacy impaired portfolio and items related to other impairments and executive severance.

While in prior quarters we did discuss other items such as significant legal accruals and other significant matters, we didn’t include them in our definition of adjusted results. MoneyGram has been repositioning for stronger growth. Management has listened to feedback from our analyst investor community and we will now include in our adjusted results, items that are expected to be non recurring or other meaningful non cash items not already included in traditional measures of EBITDA.

We feel that these enhancements to our adjusted disclosures will help our investors more effectively evaluate MoneyGram’s financial results and the economics of our underlying business.

I would also like to point out that during the quarter, we transitioned currency adjusted reporting, moving from Euro adjusted disclosures to a comprehensive constant currency methodology that is more commonly disclosed in the marketplace.

The constant currency view of our results are not yet materially different from old Euro adjusted measures we’ve disclosed in the past, but we’ve expanded our base of settlement currencies over time and will potentially make changes to our FX hedging policies in the future, so we’re expanding our measurement to include all currencies and improve transparency for investors.

Now to the numbers; net loss for the quarter was $18.3 million and EBITDA was $29.3 million. Both EBITDA and net loss were impacted by $37.4 million of significant items in the quarter. These items included $16.5 million legal accrual for our patent law suit, a $6 million legal accrual for settlement with the FTC, $9.2 million of stock based compensation and executive severance, $8.4 million in impairment charges and $2.7 million of net securities gains.

The $9.2 million item breaks out into $5.4 million for stock based compensation and $3.8 million related to executive severance. The $8.4 million of impairment charges consist of a $7 million write down on the corporate aircraft, along with $1.4 million related to capitalized software in connection with exit plans for ACH commerce business. The Aircraft write down was made in conjunction with management’s decision to sell our plane.

Adjusted EBITDA of $66.6 million in the quarter compares to $75.7 million in the prior year, primarily driven by $15.8 million decrease in net investment income as average net income yield and net investment yields were substantially lower in the third quarter of 2009 than in the prior year.

Weighted average outstanding common shares at the end of the quarter was 82.5 million. In addition, we ended the quarter with 22.6 million of shares related to stock options and restricted stock along with 370 million shares related to preferred stock on an as converted basis.

Since we get a lot of questions on this, I just want to be clear that the stock option restricted stock and preferred stock shares continue to be excluded from our share count on an EPS basis as their effect would be diluted in periods of net loss which included third quarter of 2009.

Had we reported net income sufficient to fund dividends and preferred stock accretion for the third quarter, we would have used the fully diluted count of 475 million shares in the EPS calculation.

Turning now to revenue, total revenue in the third quarter was $304.5 million, roughly unchanged compared to $305 million in the prior year. Fee and other revenue increased 3% to $295 million, largely as a result of an increase in transaction volume, offset by currency fluctuations and lower average money transfer principal.

Investment revenue declined 79% from $32 million in 2008 to $7 million in the third quarter of 2009. This decline was a result of lower yields earned our realigned investment portfolio and substantial decrease in investment balances primarily as a result of the planned departure of the official check customers.

On a segment basis, total revenue for the global funds transfer segment which includes CDC money transfer, retail money order and bill payment rose to $285 million in the third quarter from $279.5 million in the same period last year. Segment results were impacted by a 6% increase in money transfer transaction volume excluding bill payment partially offset by currency valuation changes and a decline in average money transfer fees.

Segment reported operating income of $13.7 million and an operating margin of 4.8% in the third quarter. Both operating income and margin were impacted by $27.1 million of the significant items discussed earlier. Adjusted operating margin was 14.3%.

Payment systems which include Official Check and financial institution money order, total net revenue increased to $17.6 million in the third quarter of 2009 from $14.8 million in quarter last year. Net revenue in 2009 reflects investment revenue of $5.1 million and net securities gains of $2.1 million, while 2008 net revenue reflects $26.8 million of investment revenue and $11.2 million of net securities losses and $10.6 million in commission expense.

Segment results were impacted by lower balances, down year on year just over 18% due to continued attrition on paper products from our re-pricing activities and the planned exit from certain unprofitable customer relationships.

Segment reported operating income of $7 million in the third quarter of 2009, up from $1.9 million in the third quarter of 2008. Operating margin improved to 38% in the third quarter from 7.6% last year. Adjusted margin was 21.5%.

Investment commission expense continued its trend from the first quarter and decreased $9.6 million or 96.2% from the decline in the Fed funds rate and lower investment balances in the third quarter. Almost the entire official check base of business was re-priced in 2009, with the final round effective in September.

Segments of the money order base were also re-priced with an emphasis on money order only agents. Included in the re-pricing effort were remit schedule changes focused on reducing credit exposure on this base of business.

These efforts will be fully completed by year end. In total, retail money order has experienced the same store sales decline of nearly 12%. This is attributed to several factors including increased consumer pricing as agents pass along fee increases, the movement to other payment methods and the general economic environment.

On the balance sheet, we ended the quarter with $5.2 billion of assets available to support payment service obligations of $4.8 billion, resulting in asset in excess of payment service obligations of $410 million.

Regarding our investments, 99% of our portfolio was in cash and cash equivalents and government agency securities at year end.

CapEx for the quarter was $6.9 million and $22.4 million for the full year to date.

Moving to the right side of the balance sheet, as Pam mentioned earlier, we repaid the remaining drawn balance on our revolver of $45 million in October. We plan on keeping our revolver capacity at its current level and available to us for future operating needs.

Including the recent payment, we now have paid $145 million over the last six months towards our outstanding debt obligations. Our total outstanding at the end of the quarter was $879 million, or $834 million after one would include the $45 million revolver payment.

Now I’d like to turn it back to Pam.

Pamela Patsley

During the quarter we made significant progress in strengthening our global distribution. We entered new markets. We established new important partnerships. We maximized existing relationships within our premier global agent network.

During the quarter, we increased our global network to 186,000 locations around the globe. That’s a 16% increase year over year including greater than 30% growth in Asia and Eastern Europe. In Canada we launched an additional 2,000 Canada Post locations since June and expect to reach 6,000 locations by year end.

In June, we announced our partnership with National Commercial Bank in Saudi Arabia, launching one of the county’s largest global money transfer network, making money transfer services available to six million ex-patriots across the country. This significantly expands our presence in Saudi Arabia, one of the world’s largest remittance send markets, sending an estimated $16 billion in 2008.

NCB’s extensive network of ATM’s across Saudi brings customers the convenience of sending money through any one of 1,400 NCB ATM’s across the country or by telephone or online. The early results are very promising, and again, this is just the beginning of MoneyGram’s participation in one of the world’s largest send countries.

We also renewed several key agents and expanded our relationship and strategic markets. In Brazil, we resigned Itau Unibanco, the countries largest sector bank. With the merger of Unibanco, this renewal will add 1,000 new Itau Unibanco branches to the agents already existing 4,000 Itau branches.

In Panama, we recently announced a new multi-year contract with one of the largest financial institutions in the Republic of Panama and MoneyGram’s leading agent in the country. We are well positioned to accelerate our growth across Latin America and we’re focused on leveraging opportunities in this dynamic and diverse region.

In the U.S. we re-signed New York City Banks drug store chain, [Dwayne Reed] and we added a new convenience payment service, utility bill payment to our partnership. [Dwayne Reed] operates nearly 200 stores located in some very important commercial and residential neighborhoods throughout New York City and in parts of New Jersey.

They have been offering MoneyGram money transfers, money orders, urgent bill payment and pre-pay card re-loading services for many years.

In September, we strengthened our presence in Scandinavia with an extension of our alliance with Scandinavian agent Forex Bank, a leading foreign currency exchange firm with over 100 locations in Scandinavia. This alliance continued to leverage MoneyGram’s money transfer services in a market which has over three million immigrants living and working there.

During the quarter, we also made significant progress in adding new relationships around the world. We recently announced the addition of two post offices, Cypress Post, adding more than 100 strategic locations in these key markets.

We expanded our network through respected, trusted cornerstone institutions such as these and other post offices around the globe as a vital component of our growth strategy.

In the United States, we reached an agreement to partner with CUNA’s strategic services to provide their nearly 8,000 credit unions representing nearly 21,000 branches access to MoneyGram’s global money transfer, money order and bill payment services. CUNA’s strategic services provides credit unions access to high quality products, services and technology and represents a nice opportunity to expand our money transfer services in the U.S. financial institution market.

In the Dominican Republic, we signed the country’s leading financial institution, significantly not only increasing not only our network in the country but our reach to the world consumers who in particular rely on our services. Through the addition of this agent, we are now available in more than 40 world communities that previously offered no money transfer services.

As one of the largest remittance markets in the world, India continues to be a very important market for us, providing more customers access to our service is a high priority. We recently created an alliance with Union Bank of India to add MoneyGram money transfer services to 2,600 Union Bank branch locations, reaching the bank’s 20 million account holders.

The expansion is part of an agreement signed with our largest super agent, UA Exchange Financial Services. India turned in a strong performance this quarter despite some catastrophic weather events in many parts of the country. Furthering our commitment to the region, we recently made a grant to the Red Cross to help communities across southern India recover from the recent devastating floods.

The roll out of the MoneyGram award customer loyalty program continued during the quarter with the launch of the program in France and Spain during July. We’re seeing good traction in terms of enrollees in these markets just in the first few months.

We increased the value delivered to our customers from our rewards service with the roll out of the mobile text receive notice. This service provides our send customers with a notification of receipt of a money transfer so they can be confident the funds they have sent reached their destination.

In the fourth quarter, we’ll continue the expansion of MoneyGram rewards program as we are introducing the program in Italy and Canada. The total active MoneyGram rewards membership at the end of the quarter grew 32% year over year and related transaction volume was up 36%. The loyalty generated by our rewards program continues to exceed our expectations.

For example, when we ended our money transfer relationship with U.S. Bank, we retained 89% of our customers who had been using U.S. Bank outlets and were loyalty card holders.

In what continues to be a challenging economic time, our core money transfer business did have a strong quarter. We executed well against our expansion plans and our growth rates picked up from the second quarter.

As we look ahead to the remainder of the fourth quarter and into 2010, our strategic imperatives remain the same; one, accelerate growth. We’ll do this through network expansion and through productivity of the network and broader product revenue opportunities.

Two, we’ll strengthen our relations by focusing on the consumer experience, being a more streamlined, seamless world wide company and quite simply, being more efficient.

Growth acceleration and strengthening operations as well as the continued focus on balance sheet and cash management strategies will certainly result in our third imperative, maximizing shareholder value.

It’s an exciting time at MoneyGram. Our entire team is hard at work every day, positioning MoneyGram for long term, profitable growth, and we’re focused on making the right decisions for value creation. Again, the future looks bright for MoneyGram and we’re excited about that future, and we’ll certainly welcome any additional benefit provided from an improving global economy.

Thanks for your time today, and we’ll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Kartik Mia – Northcoast Research]

[Kartik Mia – Northcoast Research]

I wanted to ask a little bit about the margins in the business. Obviously you’re seeing some positive revenue growth and transaction growth. As you look at this business, what kind of margin trends would you anticipate for the money transfer business as we move forward over the next 12 to 18 months?

Pamela Patsley

Simply not being smart or short with you, we expect improving margins. We think there is a lot of opportunity and the work that we’re doing, Jeff specifically mentioned we’ve divided some of our efficiency projects, our business transformation projects into 12 or a few more large buckets. We think we’re going to begin to realize those results beginning in 2010 and certainly the impact of those will be felt far beyond that.

[Kartik Mia – Northcoast Research]

You discussed a little bit about the payment services directive and the opportunity in the EU and I’m wondering, as you look for new retail agents in the EU, what is the current environment like? Do you anticipate having to pay up front marketing fees to get these agents or is the current environment that the ability to drive more traffic will allow you to get the agents just because your brand name and your distribution.

Pamela Patsley

I don’t think it’s solidly only one or the other choice, and it just depends a bit. The EU is a big place and that varies by market and by “type of retail outlet”. So I think you’ll see a combination and that’s what we’re prepared to address. I think we have a great model in our sales force targeting the right kinds of institutions in the various markets in the EU.

[Kartik Mia – Northcoast Research]

Final question is just a little bit about the U.S. domestic business. Obviously you’re putting up positive transaction growth it sounds like, and obviously a large competitor of yours had indicated that’s the business that they’ve had some struggles with and I’m wondering, what’s the difference? Why are you having relatively some success compared to your competitor?

Pamela Patsley

Thanks for noticing, we did have a good intra-U.S. quarter and have continued. I’ll just speak from our perspective. I think we have had great execution with some really key partners in the U.S. and we continue to look for ways to diversity that profile and balance large chains with independents, focusing and bringing more and more of a focus of our marketing efforts into key quarter pairings for U.S. outbound.

The U.S. to U.S. continues to be just very strong, and I think alternatives not just specifically our head up competitors, but by others. This is just a pretty efficient model we run and the strength of our brand and the strength of our partners has worked well for us.

Operator

Your next question comes from Robert Napoli – Piper Jaffray.

Robert Napoli – Piper Jaffray

Thank you. I think the presentation was a lot clearer and I think some good numbers. I’d love to see a little more, some of the items you talked about by geography if you could come up with a table for by geography or something with your earnings release would be helpful.

Now that you’ve paid down your debt, you point out 75 million fully diluted shares and that’s growing pretty significantly with the pick preferred, do you have any intentions or can you now that you’ve paid down that revolver, can you pay that in cash or do you expect that share count to continue to grow?

Pamela Patsley

I’ll comment first. Alex is duly noting your request for geography distribution, and you know as we continue to improve, we think improve our disclosures and our transparency, our discussion with you all quarterly, we may even evolve to include a little presentation deck.

Jeffrey Woods

I’ll just say that I’ve been here coming up on three months. We’ve spent a lot of time understanding the balance sheet and getting a more precise view of our cash generation strength, and obviously this is budget season so while I can’t comment precisely now, I would say that paying down our revolver, $45 million was a quite conservative action to make progress, but not eliminate and degrees of freedom as a more precise view of 2010.

What we want to invest in the business, other deployment opportunities for our cash, will enable us very much start to discuss as a management team and with our Board how we want to deploy the cash that will be generating even beyond those things which will be quite meaningful.

So we will have better color on that possibly on the fourth quarter call, but we’ll certainly be disclosing a lot more in the coming months.

Robert Napoli – Piper Jaffray

But having paid down that, does that remove the restriction from the banks?

Jeffrey Woods

We still have a lot of different restrictions and requirements as part of our credit agreement for the bank debt and as part of the indenture with Goldman Sachs. In addition, we have just general corporate governance parameters. So we’re taking all those into consideration against what we think 2010 is going to look like and the out years obviously.

But getting a precise view from our budget process of how much capital investment we want to make and how much cash generation will come from the core business operation will allow us to do the linear programming model to see which the best course of actions given all those constraints.

The constraints will obviously loosen as we deleverage. Our ratings get stronger over time and we start to pay off some of the debt, therefore the restrictions will become fewer and more manageable.

Robert Napoli – Piper Jaffray

Your transaction growth obviously accelerated in the quarter from last quarter a little bit. Are you, and you went through a lot of markets and the geographic chart will be really helpful next quarter, but are you seeing the pick up? Do you think you’re seeing an improvement in the global economy or is it unique to MoneyGram? Are you feeling better about the trends you’re seeing overall such that you feel like you’re getting an economic rebound in global remittances?

Pamela Patsley

I certainly don’t want to take anything away from the great execution of our great colleagues here at the company, so I think there’s an element of just our approach to growth and what we’re seeing in the field and the success there.

And I would just say it’s more anecdotal. I am not a prognosticator of the economy, but if you had to just say a general sense, there are pockets that we are really beginning to see some signs of improvement and recovery. And that’s a little bit why I added besides our three imperatives of accelerating growth, and strengthening our operations, maximizing shareholder value, will take the over arching help of an improving global economy.

And there’s a lot of leverage in our business. So cautious and you hear others that have a little more of a negative view. We’re cautiously optimistic but starting to actually see some results. And again, just to summarize what Jeff mentioned on capital, net net, we are keenly focused on improving our capital structure.

Operator

Your next question comes from Joshua Elving – Feltl & Company.

Joshua Elving – Feltl & Company

I also thought it was a nice overview of what’s transpired over the past several months, so a nice job on that. Looking at the EBITDA or adjusted EBITDA calculation or chart that you had, the amortization of signing bonuses, I’m trying to understand how to think about that going forward. It’s come down a little bit over the past several quarters. Is that a trend that’s likely to continue, or how do we think about that going forward?

Jeffrey Woods

We basically, we’ve had some volatility in that number because for a number of months there was no equity program in force and there have been some executives that have, on the signing bonus, I’m sorry. On the signing bonus, there’s just a lot of volatility in that number because we have a lot of very large retail chains that are either in a competitive pitch for a new chain or we’re renewing every two or three years.

So they’re quite lumpy. Independents are a material part of our distribution, but there’s such a high volume of those renewals and new sign ons, and they’re also lower dollar amounts, they tend to average themselves out. So we would expect the number to have a high variation quarter to quarter going forward, but in general should not be growing any more than our top line over time.

Joshua Elving – Feltl & Company

There’s a lot of one timer’s in the quarter. Do you get the feeling that you’re getting close to the end of the one timer’s here? Do you anticipate, I know it’s kind of hard to say without a crystal ball but could you argue that this is somewhat of a kitchen sink type quarter for all the one timer’s you see in the pipeline?

Pamela Patsley

We I think are working our way through this list of open items as an issue. I’m not sure I would call it kitchen sink approach, but I think we’re getting to the end.

Joshua Elving – Feltl & Company

From a higher level perspective, I think you finished up with some good points with the goals of accelerating growth and strengthening operations. I’m trying to get a sense of what revenue growth could look like a couple of years out. Do you anticipate getting back to a double digit revenue growth rate? Do you have any kind of a sense for when we might see something like that?

Pamela Patsley

We’re not going to give those predictions but we want to be in double digit transaction growth, double digit revenue growth, double digit overall top line growth. So that is where I think this company has the ability and our presence in the market, the space we play in globally, that is definitely attainable and we are working very hard to organize the company towards that goal.

Joshua Elving – Feltl & Company

On your comment about the strengthening of operations and taking a more global view of your cost structure, do you have any kind of metrics or any kind of idea how impactful maybe a review of your operations could be over the coming years? Is it significant? Is it material? Maybe without giving specific numbers, is it significant?

Pamela Patsley

Over time and you look back to this point in time, I think you will see a very significant improvement in our operations, but we’re not putting a fine point number on it now in either what margin may do or cost. There are so many variables.

But I think we’ve talked about just some specific anecdotes of examples of things that we’re not doing things most efficiently, and we want to begin to get all those large and small, and they also impact a little bit our ability to sign, board and manage our agent network.

Jeffrey Woods

I’ll just add you have to temper the expectation to see material moves in our cost structure in our financial results with the fact that we’re going to be investing a lot in the core business over the coming months and over a series of many quarters. So our expectation is that a lot of these initiatives will allow us to self fund a lot of the investment.

Operator

Your next question comes from Robert Dodd – Morgan, Keegan & Company.

Robert Dodd – Morgan, Keegan & Company

On the bill pay product, it’s been a bit of a drag for awhile now. You’ve signed a number of new services into that product. Can you give us any idea when you expect that to be neutral year over year and less of a drag?

Pamela Patsley

Again, we’re not going to give projections. I’ll just say we continue to feel better. There is no question our consumers that utilize this service are some of those most hard hit by the turn down in the economy and we’ve had the grow over of the one large billers that last I think August of ’08, so the compares are going to get better.

As you saw some of the names of those billers that focus on just through our network and leveraging the MoneyGram brand to all these different pre-pay card networks, and that segment continues to grow. We like our position. I’ll just say that. We like our position.

We’ve segmented now over the last couple of months the sales force by the different verticals that feed into the overall product. So I think you’ll like our results going forward and they will be improving.

Robert Dodd – Morgan, Keegan & Company

To follow up on Bob’s question, the covenants and paying cash on the pick, I know you don’t want to go into too much detail on them. If I remember right, one of the covenants says you can’t pay out more than 50% of cumulative net income or you can’t pay the pick in that, that covers it. That would seem to imply the pick rate you’d have to be generating something north of $50 million net income a quarter to be able to continually pay cash on that pick. Am I completely barking up the wrong tree there?

Jeffrey Woods

Conceptually you’ve got it right, but in our indenture, what consolidated net income is, is a very convoluted calculation. So there’s really an entire page of adjustments made to our actual net income to get to the indenture definition of consolidated net income.

So I think your $50 million is probably much too high relative to what actually builds our consolidated net income under the terms of the indenture, but there are also other parameters that are important as well and we have to manage our expectations from the rating agencies, where our ratings are not as high as they should be on an ongoing basis, and with our bank lenders, and with other expectations from the shareholder in terms of the strength of our retained earnings.

Robert Dodd – Morgan, Keegan & Company

On the data you gave on the U.S. bank customers was pretty impressive. Retaining 89% of those, the typical customer that you pick up through the bank channel relationship was not a customer of yours before that so managing to retain that number when the bank is no longer a channel, have you done any checks with those customers as to why they’re now going somewhere else instead of the bank when they wouldn’t have done a money transfer away from that channel before?

Pamela Patsley

I think I want to just be real clear that retention spoke to those customers that were our reward or loyalty card customers coming through U.S. Bank. Let’s be very clear, but that speaks to the strength of that product and I think that then in turn a little answers the second part of your question.

The more we can accelerate the roll out as we’ve now rolled out in several countries in Europe and the more we can accelerate the roll out of that rewards program everywhere globally and continue then to make it a more robust offering where the consumer who is looking for value finds value in that product offering. That’s really what it’s all about.

Operator

Your next question comes from Robert Napoli – Piper Jaffray.

Robert Napoli – Piper Jaffray

What percentage of your U.S. business is Wal Mart today and how much is that up year over year?

Pamela Patsley

I don’t think we have disclosed that in the past. It’s large.

Robert Napoli – Piper Jaffray

I think you have.

Pamela Patsley

I don’t think, let me be clear on your question. You were asking what percentage of our U.S. business. I don’t think we have disclosed what it is to our overall business.

Robert Napoli – Piper Jaffray

You have Wal Mart in the U.S. only, is that correct or not?

Pamela Patsley

We have Wal Mart in Mexico, obviously predominantly a receive market, but if you look to total of overall revenue, it’s around 31% for the quarter. I just want to be clear, that’s the total MoneyGram.

Robert Napoli – Piper Jaffray

Do you know what that was a year ago, and if it’s growing as a percentage?

Pamela Patsley

It has grown.

Robert Napoli – Piper Jaffray

On the credit union business, that sounds like an important signing. When was that signed and do you expect that to be a significant program?

Pamela Patsley

We think it is an important program. Will it grow to be significant, that’s hard to measure. I hope you know our denominator keeps growing but it will be a very important program for us. It reaches we think yet another sector of consumers where our service can be valuable and fill a need for them and so from that aspect, it’s a really key relationship.

Robert Napoli – Piper Jaffray

Do you have other bank customers in the U.S. at this point? Is that a significant market for you overall?

Pamela Patsley

It is not a significant market for us today, and we think it is an important market to augment the rest of our strategy. But we are not moving to just be singly threaded through financial institutions.

I assume there aren’t any other questions, and again we really appreciate everyone’s interest and thoughtfulness in participating along with us this morning, and again thank all the MoneyGram colleagues. It was great, and we’re going to continue to move onward and upward. So everyone have a wonderful day. Thanks so much.

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Source: MoneyGram International Q3 2009 Earnings Call Transcript
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