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MoneyGram International, Inc. (MGI)

Q2 2011 Earnings Call

July 28, 2011 9:00 am ET

Executives

Alex Holmes – SVP, IR and Strategic Development

Pam Patsley – Chairman and CEO

Jim Shields – EVP and CFO

Analysts

James Kissane – Bank of America/Merrill Lynch

Grant Keeney – Northcoast Research

Robert Dodd – Morgan Keegan

Ashwin Shirvaikar – Citi

Operator

Good morning and welcome to the MoneyGram International second quarter 2011 earnings conference call. Today’s conference is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Alex Holmes, Senior Vice President of Investor Relations and Strategic Development. Please go ahead sir.

Alex Holmes

Thank you. Good morning everyone. My name is Alex Holmes, Senior Vice President of Investor Relations and Corporate Strategy. I would like to welcome you all to our second quarter 2011 conference call. With me today are Pam Patsley, Chairman and Chief Executive Officer and Jim Shields, Executive Vice President and Chief Financial Officer. If you have not yet seen our earnings release, you can find it on our website at MoneyGram.com.

I must remind you that today’s call is being recorded and that the various remarks we make about future expectations, plans and prospects, constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Security 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 everyone on this call to read our SEC filings including our 10-Q for the quarter ended June 30, 2011, which is expected to be filed with the SEC by August 10.

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

Finally, I would like to mention that Dan O’Malley our EVP of the America and Emerging Markets and I will be presenting at the Morgan Keegan’s Tech Conference on August 9 in New York City. We certainly hope you can come out and see us.

And with that, I will turn the call over to Pam.

Pam Patsley

Great. Good morning, everyone. Thank you, Alex. Clearly, the highlights of the second quarter is our double digit money transfer revenue, transaction and location growth all of which accelerated from the first quarter. I had said that our focus needed to be on accelerating top line growth and we are achieving our expectations in this area. Yes, to more competitively position us for future growth, we’ve also been reinvesting in our core business, focused on improving our capital structure and cleaning up legacy issues.

Now let’s get into the quarter as there are some very nice results to call out here. For the second quarter, total revenues increased 9% to $310 million and total fee and other revenue increased 10% to $304 million. Adjusted EBITDA for the quarter was $64.2 million and adjusted EBITDA margin declined to 20.7%. The decline in adjusted EBITDA margin was primarily related to increased marketing spend during the quarter of $5.3 million. Increased commission expense in our core money transfer business as well as decreased operating income from both our bill payment business and the financial paper product segment.

Jim will take us through the details in a bit, but you may have noticed that we also had several items in the quarter associated with restructuring with our recap, after the impairment charges and so on all of these broadly dedicated to the turnaround of MoneyGram. This turnaround has never been solely a cost take out exercise. It’s been about making investments to increase our global brand strength and investments to enhance our core infrastructure and global operation. For top line growth, our focus is in two fold, first to return our marketing spend as a percent of revenue to historic levels through a step function increased in expense this year in 2011. On a dollar basis, this increase will mostly occur in the first three quarters of this year.

The total marketing spend increase will impact margin in 2011, but we expect to return to in a much more normalized marketing increases in future years. The second area of focus has been on increasing our sales force in key growth market and in this area, we have also made great progress. On the operational side, our focus is on enhancing our processes system that supports our infrastructure such as the global compliance function. Each systems and processes will not only make us a more efficient company, but also positions us more competitively. While we are far from finished the investments we are making in our business are beginning to take hold and we are heading in the right direction. As anticipated, these investments continue to impact margins for 2011 that our business is highly scalable and we are confident that all of these investments when fully implemented lead to an improved and a more profitable business.

For the quarter, money transfer transaction volume increased a very strong 15% with an equally strong 11% increase in constant currency revenue. This is our sixth consecutive quarter of accelerated transaction growth and the first quarter in two years of double digit constant currency revenue growth. We are certainly pleased with our achievements here.

Transaction growth was led by 18% growth in our U.S. to U.S. business and improvements in our U.S. outbound quarter. Wins [ph] originating outside of the U.S., increased 16% during the quarter as our focus on agent expansion, quarter alignment and reinvestments and marketing more than offset the negative impact of the many geo political issues across Africa and the Middle East. As in previous quarters, the difference between transaction growth and revenue growth is primarily related to changes in quarter mix. The comparative impact from $5 for $50 pricing was largely mitigated in the second quarter. Moreover, excluding the $50 price spend total money transfer pricing negatively impacted revenue growth by about 1% in the quarter. This was partially offset by a 2.5% increase in the average phase on a constant currency basis.

Jumping right into our U.S. to U.S. business during the quarter, U.S. to U.S. transaction volume growth accelerated past the first quarter’s 17% growth to an impressive 18% growth. Although we don’t share the U.S. to U.S. revenue growth number, we did meet our expected revenue forecast as we firmly lapse the largest part of the $5 for $50 pricing implementation of a year ago.

We continued to experience growth in the lower price spans with accelerating growth in the above $50 price span. During the quarter, we added two key agents to our network, to our network in the U.S. Rite Check Cashing in New York and Friendly Check Cashing in North Carolina. We are very excited to have these well-known brands added to our portfolio of locations. Wal-Mart continues to be an important part of MoneyGram’s success. We are excited to have MoneyGram’s suite of products included in Wal-Mart’s expansion plans of the Wal-Mart express format locations that are now being opened in the United States.

Now, let’s talk about U.S. outbound business, which had transaction volume growth of 10% in the quarter and interestingly on the strength of spends to Mexico. A year ago, we reported a 4% decline in transactions to Mexico. Since that time, we have steadily improved quarter-over-quarter to 12%, year-over-year growth this quarter. Although the overall market dynamics may not have changed dramatically, we’ve focused our efforts on what we could do to regain our position as one of the important money remitters to Mexico and we believe we are gaining market share in the US to Mexico’s spends market.

And by the way, since this U.S. outbound metric is new, I will also share with you that it was 9% for first quarter growth. The U.S. spends to Latin America and the Caribbean showed good growth over a year ago. In LAC, we launched our service with PUH in Haiti early in the quarter, which is an additional network bank partner to augment our already strong agent network in Haiti. Since Q1 from Haiti continued to grow, moving to South America, we just announced agreement, which expands our network in Columbia, Peru, and Paraguay. The addition of Bank Columbia, Banco de Credito Peru, BPP and Banco Vision in Paraguay will add over a thousand locations. These are important new relationships for us.

South America represents robust revenue and product expansion opportunities for MoneyGram. We are focused on building our U.S. outbound business. Beyond LAC and Mexico we have been accelerating transaction and revenue growth from the U.S. primarily to China, to India, and Southeast Asia. Looking now at since originating outside of the U.S. We just spoke about our Latin America receipt market, but we also continue to develop our outbound an intra LAC money transfer capabilities as migratory patterns continue to shift and change across Latin America.

In the second quarter, we saw excellent growth and since from Haiti, Costa Rica, Dominican Republic, Chile and Brazil. Clearly an important part of our sense originating outside of the US is our European markets where we continue to see very solid growth. Italy delivered strong results with transaction growth again exceeding 20%. In France, where we recently surpassed1000 locations, with the addition of four large new agents, transaction volume exceeded 50% growth assisted by the reopening of the Ivory Coast in May. Transaction volume growth in Germany and the UK accelerated sequentially for the second straight quarter while the transaction growth rate in Spain it did contract a bit. Now growth in Romania was also strong again, and our business in the CIS improved during the quarter a sense from Russia benefited from the continued ramp up of per bank location.

In the first quarter, our service in both Ivory Coast and Libya were temporarily closed due to the political interact. While Libya remains closed due to U.S. sanctions, the Ivory Coast reopened in May with accelerating growth in both sent and receipt, through the month of June as this business continues to ramp back to pre prices transaction levels. In Morocco, we announced the addition of Al Barid bank, now MoneyGram’s largest agents in that country with 1800 locations, and we also opened an office in Casablanca to better support growth in this important country and region.

As we celebrate the second anniversary of our agreement within NCB in Saudi Arabia, we continue to be extremely pleased with the outstanding growth we are achieving there. Saudi is the world’s second largest spends market and in just two short years it has quickly become MoneyGram’s tenth largest spent country. Continued improvement in the UAE along with solid growth in Lebanon is helping to round out what’s becoming a very productive region for MoneyGram. The team in the Middle East has got excellent relationships with our partners and has a good pipeline of opportunities.

In India, we were excited to launch our service with Bharti Wal-Mart and Bharti Retails through 138 locations across the country, MoneyGram is pleased to be the first money transfer brand introduced in retail chain locations in India. Adding convenient hours and making our service available to frequent shoppers. Our transaction growth in India exceeded 35% and across the entire India’s subcontinent, we added more than 1800 locations in the quarter.

In the Asia Pacific Region, we added more than 4300 locations during the quarter and saw a big improvement in our Malaysian outbound business. In China, we continued our network expansion. Bank of China now has more than 7000 active locations and MoneyGram’s network in China now reaches 25 provinces. In the Philippines, our transaction growth exceeded 35%. During the quarter, we opened a new office in Manila to better support continued growth in this region, and we also launched our direct to bank account service Banco De Oro.

In Canada, where revenue and transaction growth during the quarter was very strong, we continued to build the MoneyGram brand. We recently announced the extension of a multiyear contract with Canada Post. Through this agreement, we will also be adding our bill payment capabilities with the Post.

This is our first full step outside of the United States in offering the bill payment product. We have adjusted our systems to manage multiple currencies and its resources to focus on billers set up and we will be launching this product later this year. We have much more to do in Canada but we are very pleased with our extended agreement with the Post.

Now speaking of bill pay similar to last quarter transactions volumes have declined 8% and revenue declined 11% as the consumer credit segment continues to be negatively impacted by tight consumer credit markets particularly in subprime sector. However, in the first half of the year, we launched over 200 same day billers and we expect to add a similar number over the second half of the year. Additionally, we are also seeing strong growth in our new segments such as mobile top up. We now expect the leveling out of the bill payment business as we move to the latter half of the year.

I mentioned our increased marketing spend earlier, so let me highlight for you a couple of our main activities during the quarter. MoneyGram’s global marketing investment in the second quarter was concentrated on three things. First, Mother’s Day in the Americas, where we placed heavy emphasis on U.S. to LAC and Mexico quarters secondly, on ICC Cricket and thirdly on the global brand strength side. These initiatives included signage at 4500 billboards across France, subway station marketing in Moscow supporting our rapid network development and our brand presence there is Russia. Television was also a key component of our marketing makes this quarter with the Spanish language campaign in the U.S. and other TV campaigns in the Balkans and Italy.

Our marketing investments during the first half of the year is building our brand as we ramp up to the transaction heading fourth quarter. We continue to refine our marketing messages to help us recharge that MoneyGram brand with fresh and consistent messaging. As reflected by a 15% transaction growth in the quarter, I think we are on the right track.

Now, I would like to take opportunity to discuss with you the items in the other matters section of our press release. These items are going to be covered in the 10-Q, but since that won’t be filed for a few days, we put them in the release so we could discuss them on the call today.

First, during the quarter, the company benefited from $32.8 million of net securities gain related to the receipt of $19.2 million and $13.6 million settlement equals to all of the outstanding principles from two securities classified in other asset backed securities. These securities had previously been written down to a nominal fair value and the receipt of the cash resulted in net security gains in the quarter. Importantly, MoneyGram continues to pursue every possible effort to recover principles from other securities. Also in our earnings release, you saw an update to our previously disclosed matter related to the U.S. District Court for the Middle District of Pennsylvania.

For several reasons, I believe, this investigation is similar to the FTP matter, which was resolved in 2009. But they are not sustained; they both cover essentially the same timeframe of 2004 through 2008 into early 2009 and involve many of the same agents and issues. Now that said this legacy matter is a challenging issue to work through, particularly as it relates to a time period that involve different senior management team. But I can tell that we are putting every effort forward to resolve this matter. We are now stronger and improved MoneyGram and the investments we have been making are foundational to our future.

As a key objective of our turnaround plan for MoneyGram, we believe we are taking concrete action in recent years to step up our regulatory compliance programs and both through the antifraud protection, we provide to our agents and customers. These actions include significant enhancements with staffing, processes and technology geared towards preventing consumer fraud and ensuring that we make the highest standards of regulatory compliance. We have instituted a more comprehensive organizational structure with new management in a number of areas including AML compliance regulatory training and security and investigations. The purpose of such additions is to combat consumer fraud and faster cooperation with law enforcement. We have reinvented MoneyGram’s compliance, AML, case management and antifraud alert systems for the last two years. And we have expanded the number of employees in our antifraud department dedicated to preventing and interdicting consumer fraud.

Well, it’s a long summary it’s important to understand that on the one hand we are managing our cost structure down and doing a lot of great things in that area. On the other hand, there are areas that we are not been stingy on. We are investing in our systems and we are committed to being the best. Also in the quarter, we took an asset impairment charge related to the pending sale of 11 acres of land in Denver, which was purchased in the spring of 2006. We also took an asset impairment charge for the pending sale of our property bridge business, which was an acquisition the company made in 2007. Much like the sale of the company aircraft the sale of ATH commerce business and the sale of FSMC [ph] business in prior years we continue to look for opportunities to focus MoneyGram on our core business and dispose of assets that are not beneficial to our current operations.

Finally, it would be (Inaudible) of me to not also mention our efforts to improve our capital structure. During the quarter, we were excited to complete what we are calling our 2011 recap transaction versus the 2008 recap, which occurred under very different circumstances. The 2011 recap in all dilution to common shareholders associated with the former preferred equity. At the close of the quarter, MoneyGram now has 571.8 million shares of common stock and common stock equivalences outstanding.

Also in the quarter, we closed on our new senior secured credit facility. The new $540 million facility consists of $115 million five year revolving credit line and $390 million six and a half year term loan. The new term loan bears interest at LIBOR plus three and a quarter with a LIBOR floor of one and a quarter and extends our senior debt majorities to 2017 from 2013. Clearly, we are focused on the turnaround of MoneyGram and ensuring that MoneyGram is the best money transfer company.

And now Alex will highlight some exciting activities in our channel and product areas

Alex Holmes

Thank you, Pam. During the quarter, we continued our focus on expanding our core money transfer business into new channels and products. Highlighted again by our very successful U.S. based MoneyGram online business, which continued its impressive growth. Second quarter transaction volume increased 35% and revenue increased 32% over the prior year, both very strong numbers off growing denominators. As an organization, we continue to focus on making investments that enhance our core product set. In certain areas, we feel that these investments are giving us a step up on the competition but on other areas we are still playing a bit of catch up. To that end, we are very excited to be announcing the launch of our first multi currency send capable market.

Although we have had the functionality to pay multiple currencies for many years, the ability to actually send in multiple currencies as a new capability for MoneyGram and one that has been a limiting factor to our growth in certain markets. As of today, we are open in one market where you can now send in your choice of local currency U.S. dollars and Euros. This functionality meets the local market needs for customers who want to be able to perform a simple transaction at the agent location and avoid additional FX conversions from the currency in the senders hand to the currency available to the receiver. We are planning to roll out this service in multiple markets through the remainder of the year.

As Pam mentioned, on May 30 we launched our new account deposit service into the Philippines. The program enables fund to be received by account holders in Banco De Oro the largest bank in the Philippines and customers of 15 other major banks. An additional 35 banks are expected to begin offering the service later this year. We are excited about the launch of our account deposit service in the Philippines as it enables us to provide a key product that was missing from our service offering in this very important remittance market. In addition to the Philippines, we also offer account deposit money transfer services in Poland and Mexico. We are currently rolling out this service to our send agents in many markets and are diligently working on addition new account deposit service whether it be with the bank, a card or a mobile account in other markets.

One additional thought here and that is this. Through the combination of MoneyGram online and our direct to account services, we are now in essence to enabling consumers to send and receive completely cashless transactions or if you will make an essence an account to account money transfer. For a company that is largely known for being a cash-to-cash business, all in all this is pretty cool stuff.

Within the next two days, we will be launching our money transfer service with SunCard Group in France the provider of prepaid card whose service is also include utility bill payment and social security payment collection. Our new money transfer service will enable pre-registered SunCard holders to send and receive funds at SunCard locations. Consumers are able to store their pre-registered information on their SunCard, which then facilitates faster transactions at the point of sale. This service is available at 115 agent location across France and the French West Indies and we look forward to growing this business for SunCard.

In total, we continue to work on expanding our network and providing additional choice to our customers due to the development of several alternative channels to cash. Globally, new channels now account for 3% of total revenues and 4% of our money transfer revenues. Look out for more announcements about these new services in the coming months.

And now I would like to turn the call over to Jim.

Jim Shields

Thanks Alex. Looking first at revenue, total revenue in the second quarter increased 9% to $310 million and total fee and other revenue increased 10% to $304 million. Total revenue in the second quarter reflects strong growth in our core money transfer business. Partially offset by declines in our bill payment business and the financial paper product segments.

Now turning to expenses, there are number of adjusting items affecting various line items this quarter. To help you through these items, we have included in chart in our presentation on our website that provides a breakdown of these items, just so as to give you better clarity of how they affect each one of these items.

Turning now to total commissions expense for the quarter. Commission expense for the quarter was up $15.2 million or 12.6%, which was primarily driven by strong revenue growth in the quarter. In addition, average commission’s rate is up about a half a point as a result of changes in quarter mix and a contractual increase in commission at a significant agent. Compensation and benefits expense for the quarter was $57.9 million, up $2.7 million. Compensation and benefits was negatively impacted by one, $1.5 million related to the weaker dollar two, $400,000 in expense for pension and other retiree benefits and three some of the remaining items related to ordinary employee salary plus and our changing mix at the employee base as we investment in sales and other revenue generating headcount.

All of these increases in expenses were partially offset by lower stock based compensation of $3 million. Transaction ops support expense was up $10 million. This increase is primarily derived from increased marketing spend at $5.3 million. Restructuring cost $3.7 million and $2.6 million of legal accruals tied to shareholder litigation. Taking these items into consideration, we are essentially flat on a cost basis, which is great, considering the increased transaction volume by 15% during the quarter.

And the other expense line in the non-operating section costs were up $13.9 million. The costs reflect $4 million of acting pyramid costs for both the land sale and property bridge sale, $5.2 million of debt extinguishment and $5.5 million of other costs incurred to affect the recap. With regard to other expense items, depreciation and amortization was flat and interest expense was favorable $4.6 million.

Specific to restructuring in total for the quarter we spent $7.9 million on restructuring related costs, $2.3 million relates to the pending sale of the land, $1.5 million for severance and other personal related costs, and with the remaining cost related to efforts to further rationalize our operation. To date, we have incurred $16.7 million in restructuring expense. Since the program was announced in the second quarter of 2010, and realized just over $11 million in annualized run rate savings. These savings result from streamlining and consolidating operation in finance, human resources, customer service depot and other back office areas. We are creating an efficient scalable organization that is positioned for possible growth and are on track to achieve our objective of between $25 and $30 million in annual savings coming out of 2012. Net income for the quarter was $26.4 million and EBITDA with $72.2 million. Both net income and EBITDA benefited from the $32.8 million of net securities gains.

Now turning to the segment, total revenue for GFT segment increased 12%. The segment reported operating income of $25.9 million in an operating margin of 9.1% in the second quarter of 2011. Adjusted operating margin was 11.9% in the quarter down from 14.2% in the prior year quarter consistent with the first quarter, segment margin was impacted by increased marketing spend, lower operating income from the bill typed business and increased commission expense.

And total revenue in the financial paper product segment, was down $3.7 million or 12%. A fewer transaction and lower cash balance is continue to negatively impact revenue. Operating income was down $2.2 million in the second quarter of 2011. Operating margin in the second quarter of 2011 was 36.4%. Adjusted operating margin was 40.8% in the quarter down 42.7% in the same period last year. Segment margin continues to be impacted by declining investment revenue.

Now looking at the balance sheet, we started the quarter with $640 million in debt. With the recapitalization, we raised $390 million in our new term loan and used $140 million of the proceeds to pay down our old credit facility. Subsequent to the recapitalization transaction, we made a $50 million payment on the new term loan that resulted in ending the quarter with $840 million of debt, consisting of $340 million of our new term loan and $500 million of our 13 and a quarter percent second lean notes from Goldman Sachs. We continue to look at the economics of refinancing the Goldman Sachs note, which is obviously a big opportunity for us to realize material interested rate savings in the future.

As far as liquidity, we began the quarter with asset in excess of payment service obligations of $244.2 million. During the quarter, we recorded adjusted EBITDA of $54.2 million and we received $32.8 million in settlements referred to earlier. Some of the key uses of cash in the quarter were one a $50 million prepayment on our debt, $20 million of debt interest payments, $15.2 million of capital expenditures, $6 million of signing bonus payment and $5.1 million in cash restructuring expenses.

The company also used $11.6 million of corporate cash in executing the recapitalization transactions net of fees and financing activities. This led to our ending the quarter with asset in excess of payments service obligation of $233.1 million. We had a very strong cash flow this quarter and with the $33 million received from the settlement of two securities, we took the opportunity to pay down debt and deliver. As we continue to generate strong cash flow in the future, our goal is to deliver the balance sheet and fund our growth opportunity initiative. Going forward, we will take every opportunity to optimize our working capital.

Now, I would like to turn it back to Pam.

Pam Patsley

Great. Thank you, Jim. We did have a great quarter and let me close by enumerating some takeaways. We had, I believe, impressive top line growth that was driven by transactions; revenue was reported in constant currency revenue. We continued robust location growth. We had strong cash flow an improved capital structure was implemented. We made a debt prepayment, we continued to reinvest in our business and we cleared more items from turnarounds to do list. I think we have talked enough this morning, so I am going to turn it over to the operator and let’s begin the Q&A session. Thank you all very much.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will take our first question today from James Kissane with Bank of America/Merrill Lynch.

James Kissane – Bank of America/Merrill Lynch

Thanks and congratulations guys on a good quarter. The agent location growth was very good 20%, can you give us a sense to competitive environment as you are trying to sign up agents, maybe the impact on commissions, in the outlook and what the signing bonus trends are? Thanks.

Pam Patsley

Sure. Thank you, Jim. I guess I can’t say that the competitive initiative to gain new agents has really changed that much. We continue to message strongly the opportunity and the leverage in lower commission rates and the impact to our profitability to all of our business development folks. So I think if I had to say, what the delta in the last couple of years I think there is a better intensity on that initiative to look for opportunities either on renewal or new signings to put in place, continue to look at and work our commission rates.

And signing bonuses, I would say haven’t really again changed that much, there are certain parts of the world that just not part of the initiative and then clearly certain categories of agents in the U.S. and certain parts of Western Europe that’s very much a part of the competitive nature. So, I just can’t really Jim point to a big change in behavior.

James Kissane – Bank of America/Merrill Lynch

Okay. Do you think the stability around MoneyGram, in the past year and a half or so is contributing to the agent location growth at all?

Pam Patsley

Absolutely, I think our messaging is crisp, I think our marketing messaging. I mean we needed to take the time right now to invest in our brand strength globally. I mean that’s just kind of a foundations and we can’t expect the kind of grow and then catch up and support the brand, I mean one leads to the other. So I think it is strength how we are operating as a company, that’s sometimes a little hard impart to impart to our agents and customers. But I think they definitely see what we’ve been doing what I call our turnarounds and the reemergence of MoneyGram.

James Kissane – Bank of America/Merrill Lynch

Okay, that’s right. And Pam, the pricing was somewhat better than what we are expecting at minus 1% and that, in spite of some of the pricing actions you have done U.S. to Mexico, by one of your competitors. What’s your sense of the outlook for pricing?

Pam Patsley

I don’t know if we have articulated this clearly before but absent kind of massive new price band initiatives we will call them. We have typically seeing from MoneyGram and we will let to Jim to get a nod of confirmation here. One as we saw this quarter 1% to 2% kind of general pricing initiative if you will. Now, we have run call it specials or things whether it’s in response to the disasters to provide basically no cost transactions sometimes, we have run holiday oriented initiatives. For us the biggest thing that impacts probably that whole kind of transaction growth and revenue delta if quarter mix for us.

Jim Shields

I just got a let me add on to what Pam has said. It’s obviously we are receiving 1% overall in terms of pricing decline for this quarter, that’s outside of the 5 for 50. So outside of the 5 for 50 effect that we saw here. I think what the key message to take away from that is that if you take a look at a company that is driving transaction volume growth of about 15%, the key driver for us and key is quarter mix and building the business and pricing doesn’t have quite as much as effect on the bottom line as some of these other key drivers that we look at.

James Kissane – Bank of America/Merrill Lynch

And Pam I think you eluded to this, just want to confirm marketing spend on stepped up marketing spend what sort of peak in the third quarter and then kind of more normalized.

Pam Patsley

On that actually Jim, on a dollar increase, the second quarter of $5.3 million was the peak year-over-year delta in terms of dollar amount increased. So it will still have an increase in third quarter, in other words, so what we did in 2011, we needed to step back up, so that’s what we are calling it kind of our step function increase in total marketing expense. Get back to normal levels 2012 and beyond after some amazing opportunity, always qualify whatever that we have money behind. It’s going to be tighter than on a rate basis to our transaction and revenue growth.

And in the second thing besides spending kind of getting back to this normal rate of revenue spend we change what we are calling the (Inaudible) we were so heavily weighted in fourth quarter. And as our presence around the world changes, holidays aren’t all in the fourth quarter and certain big holidays for segments of our consumer like Ramadan and Eid they move. And it’s fourth quarter and then its third quarter and it is moving from the third quarter back to the second quarter. And we also wanted to put more support behind some other initiatives, cricket certainly ramped up some of our marketing spend in the first and second quarter. So it’s changing that spacing, so for our fourth quarter this year, you won’t see much of a difference in marketing spend year-over-year in terms of dollar amount.

James Kissane – Bank of America/Merrill Lynch

Okay, that’s outstanding. Can I get one more question?

Pam Patsley

You can.

James Kissane – Bank of America/Merrill Lynch

Thank you, Pam. It was very nice to see the recovery of the written down principle I guess, and not to put you on the spot, it is for Jim, would you have an estimate for what you think, you could reasonably recover from previously written down securities?

Pam Patsley

No.

Jim Shields

All we could say is that we are very active in that space, you know Jim. There is obviously, we think that there is a lot of opportunity there but as you know anytime you are dealing in the legal process here, it takes a lot of effort and it takes a lot of cost and you got to make those tradeoffs between the two.

James Kissane – Bank of America/Merrill Lynch

Great job, thank you.

Pam Patsley

Thanks Jim.

Operator

We will take the next questions from Grant Keeney with Northcoast Research.

Grant Keeney – Northcoast Research

Hi, good morning. I am curious to know whether you expect the Dodd-Frank provision that affects (Inaudible), do you expect that to have any impact on your operations or with the competitive environment?

Pam Patsley

We are definitely, we the industry in the U.S. will definitely have to make some investments and make some changes to enhance our systems to accommodate whatever comes out in the rule making body for us under Dodd-Frank and some of these new initiatives at the Consumer Financial Protection Bureau, and they have to promulgate rules by January 2012. So we have been very engaged solely at MoneyGram, we have been very engaged at the industry in Washington. And we are waiting to see what comes out, we are encouraged to that they are moving in the right direction and I think that really comes from they are giving a better understanding of what really is our business.

To me the premise that our customer doesn’t know what might happen is, that’s just not what our research show. But it would generally be what it’s looking like is and then after they promulgate the rules there will be an implementation time period as well. So it will again be more about have we offered enough languages to make disclosures in are we as clear, if possible on what all the speed taxes and FX might be. So and there is some liability aspect to the rule as well.

Grant Keeney – Northcoast Research

Okay, thank you. And then just given the additional offering, the Canadian Post I think you mentioned you are adding the bill-pay offering, could you just comment on the dynamics of the Canadian bill-pay industry and is that something that’s similar to the U.S. there?

Pam Patsley

I think it is generally similar and it’s kind of the reason it makes that the first step for us, not just because it’s just the step across the border north. But it makes that the easiest step for us and in partnership with the Canada Post to offer that service.

Grant Keeney – Northcoast Research

Okay. Thank you.

Pam Patsley

Yeah, thank you.

Operator

We’ll take the next question from Robert Dodd with Morgan Keegan.

Robert Dodd – Morgan Keegan

Hi everybody. A question on your expansion in account-to-account, obviously you’re showing some significant progress there. I mean if you got any color on what percentage of the customers for that kind of service, are new to you and that you’re taking away from maybe bank wise. And then is that type of product and then as that’s hesitate a change in how you market because you might be touching on somewhat different customer base then it’s difficult for you.

Pam Patsley

I’m going to let Alex take you through that.

Alex Holmes

Hey, Robert. Yeah, just a couple of thoughts on account transfers. I think at the end of day when you look at the market, outside of the U.S. majority of our banks in the receipt side of the world are our agents are banks. And I think what the opportunity there gives you is obviously cash pay-off services are extremely necessary, required and wanted by most people sending cross border admittances to a family member that they are supporting.

I think within that world of cross border remittance is also a large population who is extremely interested in sending their own money home to a bank account that they may have left in that country. They may have a loved one or somebody else who draws in that account or maybe their own account, whether saving up to go home someday and buy a house or buy land or whatever it is that they are doing to save that money.

So I don’t necessarily think that there is a takeaway from the cash pay-out, I don’t think that the cash pay-out is extremely needed in much of the world, I think it’s an opportunity for us to enhance our business, whether it comes out of pure wire transfers are not today, whether it comes out of some of the other competition whether it comes out of other market, I think it is a little bit difficult to say.

I’ve heard studies, read different things, you think about the Philippines as an example, I’ve heard anecdotally that 70% of transfers to the Philippines are into a bank account. You think about the Pilipino market, the size of that receipt market globally within the remittance space, the amount of business that we and other competitors do on the cash pay side. You think about that opportunity just from going direct to an account, it’s just a massive opportunity.

So what we are really trying to do is enhance our service across the board, not getting away from the cash pay-out services leveraging some of the agent partners we already have. And adding that new service to the portfolio, there’s obviously, when you do that, there’s obviously, I think a challenge to rolling that out at, all of the send locations you have around the world making that service known, making it, the advertise the available particularly when you’re doing with different corridors and different migrant population.

So it will take some time I don’t think that we are necessarily changing our focus in any major way, consumers themselves evolve, younger people leave countries, they are used to different types of services and so I think it’s a slow revolution of the industry and one that should be very beneficial to us.

Robert Dodd – Morgan Keegan

Thanks a lot. And just a second one if I can, on the prepaid side, obviously I mean you have prepaid card products but aren’t making as much noise about it, as your competitor. I mean is that indicated that you are not actually emphasizing as much or just not talking about it as much?

Pam Patsley

We’re not emphasizing it as much, I mean we do not have the resources or the organization structure or focus around the prepaid gift program as Western Union is implementing or as our competitor. Actually I thought that through before talking about.

Alex Holmes

Additional to that point, I think that there is a, just as good an opportunity for us to partner with prepaid card companies, not only on a bill paying and load side but also on the money transfer side, particularly outside of the U.S. where that there are, SunCard we used as an example as on this call.

Whether the prepaid card that’s interested in enhancing their services to their consumers to provide money transfers, if we can be the money transfer provided for a prepaid card service, I mean that’s a huge opportunity for us in the money transfer space, not withstanding of course the opportunity to also load those cards and participate in that area as well. So I think for us that’s much more of our core focus than it is in terms of actually managing and building out an account portfolio as Pam talked about.

Robert Dodd – Morgan Keegan

And if I can get one more in because (Inaudible) with the GPR redemption on the Durbin side basically prohibiting ACH substantially limiting how a general purpose free loadable cost can implement these bill pay. Do you think that’s going to increase your opportunities to get into the (Inaudible) bill pay service provider who a known ACH channel, to those kind of vendors?

Pam Patsley

Well, I think not sure we fully, baked out everything around that yet and things are kind of moving and new things just coming out recently out of Washington. But I think any time there is an opportunity for MoneyGram to kind of be the engine for someone else to start a little more of the front end, presence or the distribution, we are interacted in doing that.

And I think we clearly bring some interesting capability to core competencies to that and that gives back us, we invest to be quote, on the best money transfer company with the focus on our compliance engine and all those initiatives around that. That probably even enhances those opportunities.

Robert Dodd – Morgan Keegan

All right. Thank you.

Pam Patsley

Yeah. Thank you, Robert.

Operator

We’ll take our last question from Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar – Citi

Thanks. Couple of questions here, one was just want to go back to the pricing, the negative one obviously a good number from historical terms. How sustainable is that level of a pricing decline in your view. I mean how long you think that you can maintain that. And I know I’m kind of asking a difficult question from a competitive stand point. But I just want to kind of get your temperature for it.

Jim Shields

I think with that 1% to 2% that Pam talked about is sustainable. I think you have to take a look at where we stand in the market place. We are the provider in the middle state in the market, relative to some of our competition, we are little bit lower than them and some of the relative the region players are a little bit higher. So maybe we are not quite seeing some of the price pressure at some of our competition now because of where we stand in the marketplace, which goes well for us. So to answer your question short, I think 1% to 2% is sustainable over the long-term.

Pam Patsley

With the exception of major, like we’ve kind of lapsed now, that almost the 100% of our growth over on the introduction of the new $50 price spend, so accepting kind of interest again on mutual pricing move.

Ashwin Shirvaikar – Citi

All right. And that said and that's a good pathway into my next question, the 5 for 50 obviously along with some other services that you’ve been introducing. That results in pretty good transaction growth. And with that transaction growth are you seeing that come from traditional users, so are you extending your user base somewhat?

Pam Patsley

I think our growth overall is a combination of both. And by quarter, it will lean more towards a brand or introduction and acceptance of new customers. So I think that relative prevalent of new customers coming into the service will change by quarter mix and service offering. But now we think that’s good for the industry.

Ashwin Shirvaikar – Citi

Okay. Last question if I may, if you don’t mind. The easing of the capital structure obviously, a positive thing from our investor standpoint. How much does that matter from an operational standpoint to your agents or to the process of attracting new agents and so on. Is that becoming a factor in the marketplace?

Pam Patsley

I don’t really think so, I think and this is maybe a little bit of a back store that it was a, had previously been a negative factor in that competition, we know for certain used and that is less than because it’s just not a quite a (Inaudible) but they used kind of all with MoneyGram really a financially sound company. And so it was more, we had to go, we had to respond of that. But for that it’s not really been something that we’ve had to spend a lot of time on.

I think they see and it is important for them to see that we are coming out of the recap era of ‘07, ‘08 and they see that as a very positive and a good thing. And of course again my answer varies, right? So, around the world in 244,000 agent locations, you’ve been very sophisticated agents in this space which we talked more about and you also have agents that are running individual and wash out for that, we spend more time with this subject with a certain category of agents around the globe than the masters.

Ashwin Shirvaikar – Citi

Great. Thank you. And all the best, going forward.

Pam Patsley

Yes, thank for your question. We think they all understand we are moving in the right direction and are very encouraged and all I can say is this quarters result from our growth perspective we were very, very pleased with. So operator, are there any other questions?

Operator

We have no further question. I’ll turn the call back over to you Ms. Patsley.

Pam Patsley

Okay. With that, I’ll just say everyone have a wonderful day. Thank you all as always for your interest in MoneyGram and we are here, we can follow-up on anything for you. Thanks.

Operator

Thank you. Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation.

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