MoneyGram International (MGI) W. Alexander Holmes on Q1 2016 Results - Earnings Call Transcript

| About: MoneyGram International, (MGI)

MoneyGram International, Inc. (NYSE:MGI)

Q1 2016 Earnings Call

April 29, 2016 9:00 am ET

Executives

Suzanne Rosenberg - Vice President, Investor Relations

W. Alexander Holmes - Chief Executive Officer

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Analysts

Tien-tsin Huang - JPMorgan Securities LLC

Joshua James Elving - Feltl & Co.

Kevin McVeigh - Macquarie Capital (NYSE:USA), Inc.

Robert P. Napoli - William Blair & Co. LLC

Danyal Hussain - Morgan Stanley & Co. LLC

James Schneider - Goldman Sachs & Co.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Rayna Kumar - Evercore ISI

Timothy Wayne Willi - Wells Fargo Securities LLC

Mike Grondahl - Northland Securities, Inc.

Operator

Good morning and welcome to the MoneyGram International, Incorporated First Quarter 2016 Earnings Release. 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 to your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Suzanne Rosenberg, Vice President of Investor Relations. Please go ahead, ma'am.

Suzanne Rosenberg - Vice President, Investor Relations

Thank you. We apologize for the delay. Good morning, everyone and welcome to our first quarter 2016 earnings call. With me today are Alex Holmes, Chief Executive Officer; and Larry Angelilli, Chief Financial Officer.

Our earnings release and informational slides are available on our website at moneygram.com. Please note that today's call is being recorded and some of the information you will hear contains forward-looking statements. Actual results or trends could differ materially from our forecast or expectations. For more information, please refer to the Risk Factors discussed in our Form 10-K for 2015. MoneyGram assumes no obligation to update any forward-looking statements.

Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation tables within our earnings release issued this morning and in the Form 8-K submitted to the SEC.

And now, I'll turn the call over to Alex.

W. Alexander Holmes - Chief Executive Officer

Great. Thank you, Suzanne and good morning, everyone. We are off to a great start in 2016 as we delivered strong double-digit constant-currency revenue and adjusted EBITDA growth in the quarter. Our strategic focus on targeted corridor development, optimization of the customer experience, and prudent expense controls were key to our results. Throughout 2015 and in the first quarter of this year, there continued to political and economic turmoil in certain areas of the world. This, along with the strengthened U.S. dollar has led to increased currency volatility, liquidity pressure in central banks, and pressure on labor markets in certain countries.

Specifically, we are seeing these pressures impact our business in historically strong markets such as Saudi Arabia, Libya and Angola. At the same time, however, we are seeing increased opportunities for growth and expansion. We've experienced a resurgence in growth in parts of Africa like Nigeria and Ghana and in Europe and in parts of Asia, including China. Stability from the U.S., the Latin America including accelerated growth in Mexico helped to round out a solid quarter.

On the expense side, we are benefiting from our restructuring and reorganization activities, having moved our operations closer to the market, including our Global Business Center in Poland, we are able to reduce costs and at the same time take advantage of opportunities to increase foreign exchange income.

On the digital front, we again put up strong numbers as we continued to invest in transforming the customer experience. We saw great success with mobile wallets and account deposit expansion in Europe and Asia and importantly, our innovation is being recognized within the industry.

This quarter, MoneyGram won three distinctive industry awards. For the second year in a row, we were awarded the Remittance Product of the Year by The Asian Banker which recognizes outstanding financial service companies across Asia Pacific, Central Asia, the Middle East and Africa for their vision and execution in making a real impact for customers. Whether in the digital or physical world, our customers are looking for a great experience and we think that should be a brand consistent and seamless omni-channel experience.

But before I get too far into that, let's talk a little more about our first quarter performance. For the first quarter, money transfer transactions increased 7%. Money transfer revenue increased 10% on a reported basis and increased 12% on a constant currency basis.

The difference between revenue and transaction growth was largely due to a decline in U.S. to U.S. transactions below $100 and a decline in send volume from Libya, a country that currently remains closed to banks and remittance providers as a result of geopolitical instability. Our strong money transfer revenue growth reflects the continued strength in our non-U.S. sends business, and the stability of our U.S. Outbound sends. Together, these businesses grew 15% on a constant currency basis in the quarter, and accounted for 87% of total money transfer revenue.

During the quarter, non-U.S. revenue grew by 16%, primarily driven by Africa and Western Europe. Transaction growth of 12% led to impressive constant currency revenue growth of 19%. We're able to show these growth rates even including the impact of curtailed volume in Libya and significantly lower sends to Yemen from Saudi Arabia. Non-U.S. sends now represents 40% of money transfer transactions, and approximately 50% of money transfer revenue. In the quarter, the difference between transaction growth and constant currency revenue growth came from a positive shift in corridor mix.

Our U.S. Outbound business remained strong with increases in sends to Latin America and Africa. Once again, this business posted double digit growth with revenue up 11% and transactions up 10%. U.S. Outbound represented 38% of money transfer revenue in the first quarter.

In the U.S.-to-U.S. channel, revenue was down 1%, and represented 13% of money transfer revenue in the quarter. Transactions declined 9%, which was almost entirely due to a decline in transactions below $100, which have very little profit. That said, in the bands where we implemented price changes in 2014, revenue continues to grow at exceptional rates as customers rely on our trusted brand for their most important financial connection.

Now, let's take a look at our Digital Solutions. In the quarter, 13% of our total money transfer revenue, and 15% of our money transfer transactions came from digital, with revenue growth of 31% and transaction growth of 23%. We're making significant progress toward our goal to have 15% to 20% of money transfer revenue coming from digital in 2017. And more importantly, our product innovation continues to provide exciting and award-winning solutions for our customers and our agents.

In the first quarter, we rolled out kiosks in new test markets and also continued the roll out of the new moneygram.com launching our new omni-channel platform and a new mobile app in the UK. These products feature a cleaner design, interactive engaging platforms and enhanced navigation that make money transfers easier and more convenient for our customers.

In the quarter, we also expanded our account deposit offering with launches in Nigeria and Morocco and added new mobile wallets in Bulgaria, Sri Lanka and Romania. Our product innovation and quality of service is not only resonating strongly with our customers, but also within our industry.

During the quarter, MoneyGram won two prestigious gold awards at the 2016 PYMNTS Innovator Awards ceremony. The company won Best Cash Innovation for our revolutionary money transfer kiosk solutions and the Best Comeback Story Award for moneygram.com's new state-of-the-art online platform. We are obviously very proud of these accomplishments.

I believe these awards validate our strategy and bring further relevance and credibility to our vision of providing our customers with a seamless omni-channel experience through new innovative money transfer technologies.

As we merge the physical and digital world, our business is transforming which differentiates MoneyGram in the market and enhances the experience for all of our customers. Throughout 2016 and beyond, we look forward to sharing exciting new initiatives that will continue to enhance the customer experience. I am really proud of all the progress we have made and thank our entire team all around the world for all of their hard work, innovative ideas and dedication to our customers.

And with that, I'll turn it over to Larry.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Thanks, Alex. As Alex described, we had a very strong quarter with improvements in many of our key financial metrics. In the quarter, we saw the difference between EBITDA and adjusted EBITDA narrow substantially. We had an improvement of $45 million in operating cash flow year-over-year and we improved margins leading to results that show a good start to 2016.

Total revenue for the quarter was $358 million. Money transfer revenue is $316 million, an increase of 12% on a constant currency basis. Due to the translation impact of the stronger dollar primarily against the British pound, reported money transfer revenues increased 10%.

The first quarter continued to include challenges from an increasingly volatile world. But through the strength of our brand, we were able to achieve double-digit organic growth in the first quarter. First quarter adjusted EBITDA was $70 million, representing 29% growth on a constant currency basis and adjusted EBITDA margin increase to 19.5%.

In addition to increasing money transfer revenue during the quarter, we benefited from a significant foreign exchange income. And as you know, we actively trade over 30 currencies and our customers have access to over 100 currencies around the world. We realized about a $5 million positive impact to adjusted EBITDA from these currency purchases, net of one-time charges this quarter. However, given the unpredictability of FX markets, we can't be certain if these unusually favorable market conditions will continue to exist for the balance of the year. In addition, the timing of our marketing spend will fluctuate throughout the year and we expect marketing expenses to increase approximately $8 million on a sequential basis as seasonal promotional activities and other global brand initiatives ramp up.

Commissions as a percent of revenue for the first quarter were 45.4%, an improvement of 100 basis points year-over-year in part due to our increasing focus on margin expansion. As a reminder, commissions tend to vary through the year as our business is affected by quarter mix and seasonality.

Total reported non-commission operating expenses for the quarter decreased $3 million over the prior year, reflecting our efforts to control expense growth, decreases in compensation and benefits, and transactions and operation support partially offset by an increase in depreciation and amortization.

Our cost-control efforts, which included the globalization of our labor force through our global transformation program, has begun to show results for the quarter. On an adjusted basis, total non-commission operating expenses increased only 6% from last year. This increase was largely due to a $6 million increase in depreciation and amortization, primarily driven by accelerated depreciation expense on non-core assets. Excluding the one-time accelerated depreciation, total non-commission operating expenses increased 4%.

Adjusted compensation and benefits increased approximately $4 million, reflecting investments in our growth businesses. First quarter adjusted transaction and operation support costs decreased primarily due to the previously mentioned foreign exchange income. With respect to moneygram.com, we saw sequential declines in fraud losses, and we expect this positive trend to continue in 2016 as we further refine our risk-management techniques.

Our net income and EPS for the quarter were significantly impacted by tax expense. $2.8 million of tax expense related to the cancellation of stock awards, and $7.7 million came from the settlement of our largest open tax issue. We're pleased to have this tax issue resolved and anticipate more normalized tax expense for the remainder of the year.

Adjusted free cash flow for the quarter was $32 million, an increase from a negative $34 million last year. And as I mentioned above, operating cash flow improved $45 million, while including a $13 million payment related to the settlement of a state CID matter.

Agent signing bonuses were $7 million for the quarter, down from $44 million last year and capital expenditures were $18 million, a 33% reduction from last year. We ended the quarter with $142 million in cash in addition to $3.3 billion in settlement assets.

We are very pleased with these results as it shows the continuing recovery in earnings and cash flow for MoneyGram. As we look ahead, it's important to keep in mind that we expect higher seasonal operating expenses in the second quarter and we don't expect to see the same level of FX income over the balance of the year.

But given our outperformance in the first quarter, we're increasing our full year constant currency adjusted EBITDA outlook to 9% to 11% growth and our revenue outlook remains unchanged.

And now I'll turn it back over to Alex.

W. Alexander Holmes - Chief Executive Officer

Great. Thanks, Larry. We are obviously pleased to have entered 2016 with a solid start to the year and look forward to all of the exciting initiatives we have in place for the rest of the year. Over the coming months and years, we will continue to transform our business with new technologies and experiences for the customer to deliver hybrid money transfer solutions to the market.

We are confident these solutions will enhance our customers' experience and ensure we are positioned at the forefront of the industry. Thank you as always for your interest in MoneyGram and I will now turn it over to the operator and open up for questions. Thanks.

Question-and-Answer Session

Operator

Thank you. And we'll go first to Tien-tsin Huang with JPMorgan.

Tien-tsin Huang - JPMorgan Securities LLC

Good morning. Thanks for all the details. I'll start with the U.S.-to-U.S. I guess, maybe just if we can unpack U.S.-to-U.S. I heard a few things there.

W. Alexander Holmes - Chief Executive Officer

Sure.

Tien-tsin Huang - JPMorgan Securities LLC

Is Walmart still a headwind? I mean, it sounds like the lower ticket has some changes as well. Can you give us a little bit more on that?

W. Alexander Holmes - Chief Executive Officer

Yeah. Sure. I think the U.S.-to-U.S. is an interesting story as you look at it, not only as you laid out kind of by location around the U.S. but also kind of what's happening in the U.S. itself, and then obviously the difference between Walmart and the rest of the business. So, I'd say, broadly speaking from an economic perspective, we're certainly seeing a little bit of a slowdown U.S.-to-U.S., certainly in areas impacted from oil. I read yesterday that about 180,000 jobs have been eliminated since September of 2014 related to oil investments in the U.S., and I certainly think that's reflected in our numbers.

I also think we continue to see, pretty consistently, across the country as well, a decline in transactions below $100. Interestingly though on the flip side, those transactions over $200 and as you scale up, we're actually seeing really, really solid growth in those numbers. So, it's something we continue to look at and certainly monitor. Definitely, at Walmart, we continue to see the impacts of having the two products in there, I think when you get below $100, we didn't change prices in those bands. When you get down even to the $50 transactions, I think the difference is $0.25. We continue to see that decline for us within Walmart. But on the flip side, we're doing very, very well in the upper bands and that tends to be also where the product doesn't necessarily stay within the Walmart network, either it tends to go out and come in from other places within our network across the U.S.

So, I'd say net total, obviously, we'd like to see growth in that segment. But I think where we're seeing the growth from a profitability perspective is much stronger than where it's been in the past. So, it's a little bit of a double-sided coin if you will. But I'd say we can do better. I think we'll see where that plays out. I mean we've long said that the U.S.-to-U.S. market should be kind of a single-digit growth type market. So, if we can get it back to that level, we'll be pleased.

Tien-tsin Huang - JPMorgan Securities LLC

Right. So, Alex, I think the sub $100 or the lower ticket stuff is still relatively new, I guess, in the industry. Is that a little more discretionary in terms of how people are using it?

W. Alexander Holmes - Chief Executive Officer

Well, yeah. I mean you see a number of things going on there, whether that's some gifting or want-it-done type transactions and helping people out from time-to-time. I mean it's an important part of the business certainly for a variety of our customer base. And I think it's an important product to maintain. But certainly from a driver of growth to driver of profitably and when you start thinking about remittances for remittance sake, I'd say it's a different category of transaction.

Tien-tsin Huang - JPMorgan Securities LLC

That makes sense. And Larry, the $5 million, the currency comment that you made there. What are the mechanics of that? And what triggers the plus $5 million there that you could out?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Really what it is, it's improved sourcing of our purchase of non-G10 currencies. So, we're getting just a better price than we used to and we're a little more nimble and able to take advantage of some market conditions during the trading day for example. So, it's really just like a better purchase of raw materials.

Tien-tsin Huang - JPMorgan Securities LLC

Got it. I'm sorry to pile on. Just last one. Just a follow-up on that. Was that contemplated in your guidance as an efficiency that you were looking for?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

We're getting better at it, and it's sort of embedded in our numbers. But we thought this was little higher than normal; that's why they called it out.

Tien-tsin Huang - JPMorgan Securities LLC

Got it. Thanks for calling it out. I'll jump off. Thank you.

W. Alexander Holmes - Chief Executive Officer

Thanks.

Operator

We'll go next to Josh Elving with Feltl and Company.

Joshua James Elving - Feltl & Co.

Hey, good morning.

W. Alexander Holmes - Chief Executive Officer

Hi, Josh.

Joshua James Elving - Feltl & Co.

Just wanted to touch base on some of the – I think in the past you've called out the incremental spend and compliance expected over the balance of 2016. It looks like the compliance spend is a little bit lower in the first quarter, and I just wondered if that was indicative of a lower expected spend over the balance of the year.

W. Alexander Holmes - Chief Executive Officer

Yeah. No. I think we've said, we're probably in the neighborhood of $25 million to $30 million to finish it out. What you see in the face of the income statement, that is the adjustment which is around $3 million per the expense side of it. We had a corresponding amount, as well, on the CapEx side. So, I think we're on pace to meet those numbers obviously as we've talked before. We continue to have a monitor. We continue to have requirements that we have to get to, and so the end game is obviously to get compliance with the terms of the DPA to the extent required and have the best compliance program in the industry and in the market. So, we continue to invest and we continue to move that forward. But there's really no change in the outlook for that from a cost perspective.

Joshua James Elving - Feltl & Co.

Okay. And then, so, just to kind of I guess finalize that thought. So, 2016 pretty much wraps up the majority of the components of the, I guess, the global transformation program that you have laid out a couple of years back, is that the right way to think about it? And then...

W. Alexander Holmes - Chief Executive Officer

I mean, yes, it is. I mean, at least at this point in time. We basically wrapped up most of our global restructuring efforts. Those have certainly ramped down. I think the CEP program is in good place. We still have a lot to deliver. And then, obviously, we have to monitor through 2017.

So, some of those costs will continue to be there. And every year we work with the monitor and get a year-end kind of status report on where we are. And so, as we work through 2016 we have a lot of things to deliver on. We think we have the right plans in place for that, and we'll just have to kind of take stock at the end of the year and see if there's more to do in 2017, but right now I think we're in a good spot.

Joshua James Elving - Feltl & Co.

Okay. Great. And then last quick one from me. Larry, you mentioned a normalized tax expense for the balance of the year. What does that mean exactly? Can you provide...

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Well, I think, what it means is that we'd be a full tax payer more to the high 30%, 40% tax range which is the full U.S. tax rate. That's where we're kind of expecting for the rest of the year, if it's a little better than that, it would happen at that time, but I think right now we're just saying there's no more extraordinary events.

Joshua James Elving - Feltl & Co.

Okay. Thank you.

W. Alexander Holmes - Chief Executive Officer

Thanks, Josh.

Operator

We'll go next to Kevin McVeigh with Macquarie.

Kevin McVeigh - Macquarie Capital (USA), Inc.

Great. Thanks. Hey, real nice job with the free cash flow. Nice progress there. Can you help us understand – is there anyway, Larry, to think about how that should annualize and then ultimately what will be the best use of that cash?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Yeah. We think that it's not a straight line. That this quarter was pretty good. I think that what I was describing was some of the seasonality in our expenses will probably dampen that down a little bit in the second quarter and third quarter, with then more the seasonal type of stuff we see in the fourth quarter. So, on an on and off (21:44) basis, we think that cash to cash increases and cash probably would be slightly positive for the year and we are not expecting to annualize these results.

Kevin McVeigh - Macquarie Capital (USA), Inc.

Got it. And then, you showed some good leverage on the transaction operations support line as well, any thoughts on that just over the balance of the year for modeling?

W. Alexander Holmes - Chief Executive Officer

Yeah, that includes the $5 million. So that's one of the reasons why we talked about it.

Kevin McVeigh - Macquarie Capital (USA), Inc.

Okay.

W. Alexander Holmes - Chief Executive Officer

So, that's probably – it could happen again but that's not something that we can predict. And the other thing is, you're going to have marketing spend in the T&O line and that's what we've been calling out the $8 million increase in marketing. So, I think...

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Sequentially, yeah.

W. Alexander Holmes - Chief Executive Officer

Yeah. We're not going to have the same kind of expense leverage that we had this quarter as we start to normalize expenses in the remainder of the year.

Kevin McVeigh - Macquarie Capital (USA), Inc.

Got it. And if you were to get to the benefit again on the sourcing side, that would just prove to be upside to the guidance that's out there already?

W. Alexander Holmes - Chief Executive Officer

Absolutely. Yes.

Kevin McVeigh - Macquarie Capital (USA), Inc.

Great. Thank you. Nice job.

W. Alexander Holmes - Chief Executive Officer

Thanks, Kevin.

Kevin McVeigh - Macquarie Capital (USA), Inc.

Okay.

Operator

We'll go next to Bob Napoli with William Blair.

Robert P. Napoli - William Blair & Co. LLC

Thank you. Just of that $5 million on the FX, I mean, some of that it sounds like it now embedded within your improvements in your business permanently and some of it isn't. Is that the way to think about it? Like how much of it is unusual benefit? Is it all unusual benefit? Do you think – maybe breakout that $5 million a little better?

W. Alexander Holmes - Chief Executive Officer

Yeah. I mean, Bob the thing about it is that exchange markets are all over the place. And I think that I would say over prior years, maybe we weren't positioned to take advantage of those market conditions. So, now when they exist, we can take advantage of it. But it's still based on things that is somewhat out of our control because the market conditions has to be right for us to take advantage of it. And that was – the $5 this quarter was pretty extraordinary.

Robert P. Napoli - William Blair & Co. LLC

Okay. But the improved sourcing should be something that is there regardless, right?

W. Alexander Holmes - Chief Executive Officer

Yes. Absolutely. I mean, buying currency is the place end markets are settling with our agents, and placing that in the markets for the customers is obviously just part and parcel of what we do. And so the fact that we've been able to get much better FX, get much more globally aligned on that, and look very differently at our business, and how we operate and manage it globally around the world, I think it's a good opportunity for us. So it's something we've been focused on as part of the global transformation, and part of our restructuring efforts. And it's been certainly helpful in the first quarter.

Robert P. Napoli - William Blair & Co. LLC

And then when we look at 2017, I know you maybe structurally adjusted and you're better positioned from a tax perspective. What would be a tax rate to think about in 2017? I don't know if that changes...

W. Alexander Holmes - Chief Executive Officer

It's a fantastic question. We're probably about 90 days early from talking a little bit more about that, but, no, we're getting closer to implementation of a structure that we think will, again, continue to help us operate the business more globally with a particular focus on international, and then the net of that should have an impact on our tax rates. So we're close, and we'll be talking about that more in the coming months. But I'd certainly would anticipate and hope at this point in time that for 2017 we would see an improving tax rate.

Robert P. Napoli - William Blair & Co. LLC

Okay. And then just on free cash flow, I think, Larry, positive for the year. Trying to understand where the adjusted EBITDA of $70 million. Seasonally, the first quarter is why you had those benefits. It's also a weaker quarter, and looking at your guidance, you're going to be somewhere around $315 million of – I'm sorry, your EBITDA is not going to change all that much. You're going to be at least over $60 million on a quarterly basis if not $70 million. Are we going to see a big pick-up in signing bonuses? Are you changing your guidance for signing bonuses, CapEx? I think you had guided to $80 million of CapEx?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

CapEx is not a straight line, so you could see some increases there. And then also signing bonuses are not a straight line.

Robert P. Napoli - William Blair & Co. LLC

Right.

W. Alexander Holmes - Chief Executive Officer

Yes. I think when you look seasonally at the business, you're probably going to see an increase in some of the marketing spend, the CapEx outlays and some of the signing bonus outlays certainly in the second and third quarter. And then the fourth quarter is obviously always historically a strong quarter for us. So, yes, I think your view is right, but no, we're not changing our outlook for those investments.

Robert P. Napoli - William Blair & Co. LLC

Okay. So your free cash flow should be solidly profitable for the year, I mean solidly positive versus the modestly positive I would...?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Yes. I don't think we're expecting to turn negative to offset, yes.

Robert P. Napoli - William Blair & Co. LLC

All right. Thank you.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Sure.

Operator

We'll go next to Danyal Hussain with Morgan Stanley.

Danyal Hussain - Morgan Stanley & Co. LLC

Hi, Alex and Larry. Thanks for taking the question. I just want to ask about transaction volume, decelerated a little bit in the quarter and you called out the sub-$100 U.S. and you called out Libya. But were those really the two drivers? Is there anything else in there to call out?

W. Alexander Holmes - Chief Executive Officer

Yes. I think another big driver of that was Saudi Arabia to Yemen. I think when you take a look at Yemen and Libya, both were effectively closed for what I would call geopolitical or more serious concerns. Saudi to Yemen is a pretty low RPT quarter, but we do a lot of transaction volume. It's an important market for Saudi Arabia sends. They have a lot of Yemenis immigrants in the country that are doing a lot of contract labor. So that slowed down quite substantially in the quarter, which had an impact not only on transaction volume but also impacted our transaction volume on our self-service and digital metrics a little bit because we do a lot of kiosk and ATM/online driven transactions out of Saudi as well. So it had a double effect there.

And we saw a little bit of slowdown also Saudi to a couple other countries. And so Saudi is something we're certainly keeping an eye on. We're hoping to get Yemen back up and running. Obviously, that's a little bit more of a government-controlled situation. Certainly, Libya is the same and then U.S. to U.S., again, we had a lot of transactions in that under $100 band and obviously it doesn't impact profit much and certainly doesn't hurt revenue very much, but it hurts the transaction volume numbers.

So I would say when you parse those two pieces out, very comfortable with where we are on a transaction growth rate, and honestly, at the end of the day, our focus is on growing our business profitably, focusing on those corridors where we can maximize returns, maximize revenue and have the most impacts on the business. We obviously have a mix of business that comes in lower RPT corridors or lower-priced transactions. And so when you lose those, it obviously hurts the transaction numbers, but that's not really what our focus is on at this point in time.

So we're also focusing very highly on which locations are the most profitable for us, which transactions are going where, where the customers want to go and pick up those transactions, how do we promote that type of behavior in our product, because it's really not about just how many locations you have and how many places you are. It's about where customers want to be and how do you effectively manage those pieces of business, and so that's driving a lot of profitability improvements for us and we're excited about it.

Danyal Hussain - Morgan Stanley & Co. LLC

Got it. And then you called out mix as being favorable in the quarter, but overall pricing mix impact was pretty strong for the quarter relative to the past few. Could you just parse it out between the two and maybe talk a little bit more about how pricing was?

W. Alexander Holmes - Chief Executive Officer

I would say pricing in and of itself was relatively stable. So if you look at it kind of on a corridor-corridor basis, pricing was relatively stable. It was really mostly mix impact and shift in the business model that drove the difference.

Danyal Hussain - Morgan Stanley & Co. LLC

Got it. And you didn't provide, I think, the transaction growth and mix in the deck or in the release, I think. But it sounded like you provided some of those in your prepared remarks. Could you just go over those again?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

You mean by segment?

Danyal Hussain - Morgan Stanley & Co. LLC

Yes.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Or by pieces of money transfer breakout.

Danyal Hussain - Morgan Stanley & Co. LLC

Right.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Sure. Yes, non-U.S. transaction growth was 12%. U.S. Outbound was 10%, and U.S. to U.S. was a decline of 9%.

Danyal Hussain - Morgan Stanley & Co. LLC

Perfect. Thank you.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

That nets to the 7%.

W. Alexander Holmes - Chief Executive Officer

Yes, you're welcome.

Operator

And we'll go next to Jim Schneider with Goldman Sachs.

James Schneider - Goldman Sachs & Co.

Good morning. Thanks for taking my question. Relative to where you started the year and your expectations in terms of the strengths of various corridors and markets, you noted some departures, sounds like some changes in the Middle East and Africa. Are there any other sub-markets that came in notably weaker or stronger than what you expected back in February?

W. Alexander Holmes - Chief Executive Officer

From expectation in February, I would say not particularly. I would say we still continue to work through what I would say are some challenges in Russia, Ukraine. Obviously, with the Crimea situation, some restrictions have been put on, on how sends can flow into those countries. We've had some slowdown in sends out of some countries in Central Latin America, some of the Caribbean, a lot of that related to some Central Bank liquidity issues, around currency fluctuations, these types of things where it's just more difficult to get currencies converted back and out of countries.

But those are kind of little impacts. We've had very strong growth in places like China. I think we had some very strong growth in a lot of our Asia Pacific market. That's a big area of focus of growth for us. Again, the U.S. was pretty stable on the outbound side. So, net-net, I'd say it was very positive with some increases in certain places, a little slowdown in others.

The resurgence in Western Europe and actually also Eastern Europe has been very helpful on the business, that was something a couple of years ago we saw a big slowdown in. So the return of not overly amazing growth, but at least stable enough growth to get us comfortable that those economies have stabilized a bit and that there's not a lot of disruption to our business. That's been very positive as well.

So it was an interesting quarter. I think at the end of March we saw a pretty big slowdown, but that seems to have recovered in the first part of April. So some of that's Easter-related, some of that's others. We have an exciting second quarter coming up. We have Mother's Day, which is always big for us. It's actually Mother's Day in a couple different areas of the world at different times throughout the quarter, and then we have Ramadan move forward this year into the second quarter towards the June timeframe. So, there's some holidays that ease in front and the back. So there's a lot going on. It'll be exciting to see how the business performs.

James Schneider - Goldman Sachs & Co.

That's helpful. Thanks. And then maybe one for Larry. Just in terms of the OpEx, you talked about marketing expenses ticking up $8 million in Q2, but then you also got the $5 million, I believe it was, benefit from the FX market impact in Q1. So, first of all, does the FX thing carry forward for the rest of the year? And what would you expect the normalized OpEx run rate to be for the remainder of the year?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

No, I think what we're saying is, is the $5 million is not going to carry forward. I think we're saying, there could be something, but we don't know what it is, but it'll be unlikely to be $5 million. And then where we called out the marketing spend of $8 million, I think, that's a more normalized marketing spend. And as Alex was just describing, when you get these holidays in there, we do use a lot of marketing around those. So that's where I think you have both of those impacts that you need to consider for future quarters.

James Schneider - Goldman Sachs & Co.

Thank you.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Thanks.

Operator

And we'll go next to Sara Gubins with Bank of America Merrill Lynch.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Thank you. Good morning.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Hi, Sara.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Nice to hear about the resurgence in Western Europe. Was there much variation by market? And could you remind us how much of your revenue is coming out of the UK within Western Europe?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Sure. No, I think we've seen a very nice recovery across really our largest markets. I would say the UK, Germany, Italy, Spain, France, kind of the big ones; obviously, good growth when you're in the Southern Europe piece, you get some nice sends to French-speaking, Africa out of France, you get the Morocco transfers in Spain, but then obviously, you have a bridge back to Latin America. Italy goes Eastern Europe and parts of Africa. You get a little bit of Asia mix in there as well. The UK, obviously, I think the UK sends to 193 countries around the world. So it's a very dynamic place. But, no, so I think it's really across the board, continued growth and expansion in Germany. We've done some nice things in Central and Eastern Europe to continue to expand the markets. We've seen a recovery in some historically good growth markets for us that have dropped off a little bit in places like Romania, Bulgaria, we even saw a nice recovery in Greece. So across the board there's some good strengthening there.

The UK, we have a very diverse business model in the UK. Obviously, the UK post office plus a number of large scale retailers for us, TESCO included in that. So we're very comfortable of our position in the UK. We don't really have any market across Western Europe that represent more than 4%, 5% of our business. So it's not huge by any means, but it's a very, very nice market for us.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Okay great. That's helpful. Thank you. And then just a broad question on the digital market and the competitive landscape. Any update on what you're seeing from a competitive perspective and are you seeing any changes in the dynamics in online pricing? Thanks.

W. Alexander Holmes - Chief Executive Officer

Sure. No, we haven't seen much in the online pricing. I think certainly we are working pretty diligently on our go-forward strategy on online pricing. We've had, I think, more of a – when we originally launched the service, I think, we had more of a blanket approach like we do for, broadly speaking, a lot of markets where you just put in a price and then you tend to change it by corridor. I think our focus now is on those corridor pricing online.

From a competitive perspective, I'd say it's about stable from where it's been. Obviously there's a lot of noise, and press releases, and conversations still coming out of what I would call broader fin tech startup-type companies. But I would say that the impact on our business has been minimal. We're growing through that. I'm not dismissing them in any way. They have nice services. But I think that what we've been able to do is not only add new partners to what we call the digital business but also convert a lot of our current cash customers to also then move more into the digital space and maintain that cash business.

So we're getting that multichannel option for those senders and receivers not only on the send side but also on the receive side, and I think that's been pretty exciting for us because basically we can increase and enhance our service to our customers, but basically stay with the same partners that we have today. So it's really clearly from that perspective is bridging the physical and digital world. And a lot of banks around the world are focused on how do they improve their online platform, whether that's through mobile wallets or just mobile access, like utilizing their ATMs, pushing out kiosks, and so we're just working with our partners to plug into those, and it's been very positive.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Great. Thank you.

Operator

We'll go next to Rayna Kumar with Evercore ISI Investments.

Rayna Kumar - Evercore ISI

Good morning. Do you expect to reduce pricing in the U.S.-to-U.S. corridor particularly for transactions with average tickets below $100?

W. Alexander Holmes - Chief Executive Officer

No, not at this time. Generally we don't talk about pricing strategy for specific corridors, but no, I think $4.75, $5.00 is pretty reasonably priced for that particular service, and no, we don't really have any definitive plans at this point in time.

Rayna Kumar - Evercore ISI

Can you call out your current agent location count and your target agent location growth for 2016?

W. Alexander Holmes - Chief Executive Officer

No, I think the boilerplate is still north of 350,000 agent locations. Honestly, we are focused on the digital convergence, the digital expansion, account deposit-type services, these types of things and broadening our service with our agent partners. We're also focused on which of the locations within our network are the ones that are the most popular for our customers, how do we promote those locations and drive utility and visibility into those.

So we absolutely have plans to expand and continue to grow our network, but we want to do that very thoughtfully and very tactically. I think the old days of adding locations for the sake of adding locations are over, at least within MoneyGram. It used to be really great to have a huge network, and you could hang a sign and you could market it. But when you find you had 1,000 locations and customers go to 200 of those, the other 800, it used to be nice to have sign there, but it certainly adds cost now. It's becoming a bit of a compliance challenge because you have to have training, you have to have it rolled out and staffing. And if you're doing a couple of transactions, I think longer term, you need to look at that and decide is that really worthwhile.

So, having locations around the world is extremely important. Being in as many places as you can is important, but when you're in those locations, customers have affinity for certain types of agents, they have affinity for certain places within cities that they like to go. We're focused on that right now. So, pure growth of the agent locations in the network for us is really not at the forefront of our strategy.

Rayna Kumar - Evercore ISI

Got it. That's very helpful. And if you can just discuss your strategy for future debt pay downs?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

What was the question?

W. Alexander Holmes - Chief Executive Officer

Debt pay down.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Oh, yeah. I mean, we got a little lift from this quarter in terms of our leverage calculation. And so we expect it to kind of start – we had an interruption in our deleveraging glide path with the last year, so this quarter helps on that calculation. I think that we still have 2020 maturity. Right now, we're not breaking out any portion of our cash flow for debt pay down, but we'll look at it opportunistically as the year progresses. I think that, all-in-all, we know we have a deleveraging structure to our debt covenants and that's top of mind, but I don't think we're pointing anybody to any kind of pay down strategy at this point.

Rayna Kumar - Evercore ISI

Thank you.

W. Alexander Holmes - Chief Executive Officer

Thanks, Rayna.

Operator

We'll go next to Tim Willi with Wells Fargo.

Timothy Wayne Willi - Wells Fargo Securities LLC

Hey. Good morning, Alex and Larry. A couple of quick questions on digital. A lot of my other questions were hit on earlier here, but going back to just sort of the user experience, obviously you guys rolled out I think new website and screen flow and stuff like that, pardon me, a couple of quarters ago. Just as you look at the metrics and the frequency and the retention, et cetera, around the digital channels, specifically the online and the mobile, anything to point out there in terms of elevation and engagements or improvement, any type of metric that you would've tracked or hoping to see improvement on?

W. Alexander Holmes - Chief Executive Officer

Yeah, it's a great question because it really is in the online space, it's the balance between not only attracting customers and then retaining customers, but then you have to balance that with your fraud and risk management capabilities and then certainly look at it, I think we answered it a little bit earlier, on the quarter-by-quarter kind of management, right, the people transacting sending to Latin America, Mexico are different from those that want to send to India, et cetera, et cetera. So, how do you attract and retain customers differently. The wonderful thing about online is that you have customers that are registering. You can talk to them and send them promotion materials, et cetera.

The best customers that we're finding right now in our business are those that want to transact both online or digitally or they want to go in-store as well. And so I think that what's really exciting about it is that we're finding much more closer application with our customers for the walk-in business and the online. And so those customers that want to go both places are what we're really focused on.

I mean, at the end of the day, it's interesting, right, because our business was built on being this cash-to-cash business. And I think the misnomer is that because of technology, other people are going to displace us in the industry because somehow for MoneyGram does cash-to-cash because it's all we're are capable of doing. The reality is, is that the reason we're doing cash-to-cash and we're successful with it is because that's what customers want.

Now, as consumer behaviors change and you have different generational gaps and different things that customers want to do like put money into account or use a kiosk to send or they want to use their mobile phone, we want to be in that space.

So to me, it's a little bit like the merchant world. We want to be kind of tender agnostic, right? We want to be able to allow customers to send, if they want to send and pick-up in cash that's great. If they want to use their cards or their bank accounts and move it to bank accounts, that's wonderful as well and that's how we should be. So, we should be very agnostic in my opinion as an organization toward how people want to move money. I think we need to have the abilities to move it in as many ways as possible. And so that's really what we're trying to more flesh out and build. And so, we've had a lot of success with that and I think we'll continue to have that success going forward.

So, I think when we use the word hybrid, it really is hybrid. We use the word omni-channel as well. It's about bridging all of that and creating that capability and I think we're really having some good success with that in a number of the markets that we're in. Now, does it work in every market yet? No. Is it available in every market yet? No. But over time, we'll build that and the more we can talk to our customers, the more we can understand their needs, particularly on the receive side, not just on the send side. We can build that bridge to the customers and back to MoneyGram and I think that's exciting.

Timothy Wayne Willi - Wells Fargo Securities LLC

Let me ask a few quick follow-ups if I could, just on digital. Number one, do you have any feel or number, percentage of digital that are truly end-to-end digital where the recipient is also truly taking the money digitally and keeping it in a bank account, on a card, in a wallet as opposed to receiving a digital transfer, but cashing it out. Is there anything to call out there in terms of the recipient side and their behavior?

W. Alexander Holmes - Chief Executive Officer

Nothing that I could make a blanket statement about. I mean I think that there are certain areas that you do that. I think it's also different tiers of customers as well. I mean obviously, the best example that I could probably use would be the high-end Indian customer looking to move money from their bank account in the U.S. to their bank account in India. Obviously, that's a different customer than what MoneyGram would have traditionally had, and so there's a lot of markets around the world where I think we can more capitalize on that type of opportunity. But no, I don't think there's anything right now that I'd be comfortable calling out as sort of a definitive percentage that really drives that type of performance.

Timothy Wayne Willi - Wells Fargo Securities LLC

Okay. And then, my last one just going back to the comments in the prepared remarks around fraud losses improving on the digital front. In terms of margin levers and I guess, maybe the magnitude of that fraud improvement, is that something that you think can have a meaningful impact on the margin of digital, I know there are a lot of other things that drive it, but just sort of trying to think about that specific channel and margin levers and obviously fraud is something a lot of people are spending money on and trying to get their head around.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

Yeah. I think, first of all, in a truly digital world, right, you don't have agent commissions. So you're substituting those expenses with things like interchange and then also fraud losses because in an agent model, we don't really have losses associated with individuals. We have agent risk. So, there has been some learning that we've been going through as we've been rolling out new technologies and finding where these weaknesses are. We did see substantial increases last summer and we're well below those now.

So, that is one of the numbers that we use in terms of calculating our target profitability, is that there's a certain tolerance that you can have for fraud losses or it's not necessarily fraud losses either, it's just people that don't have limits on their credit cards or their ACHs balance or like that. So, it is a permanent aspect of the business, and it just has to be calibrated to the right degree to ensure that you have the margins left over at the end of the day.

Timothy Wayne Willi - Wells Fargo Securities LLC

Great. That's all I had. Thanks very much.

W. Alexander Holmes - Chief Executive Officer

Thanks.

Operator

We'll go next to Mike Grondahl with Northland Securities.

Mike Grondahl - Northland Securities, Inc.

Hey, guys, thanks for taking my questions. Two quick questions. One, the uptick in marketing spend in 2Q by $8 million, was any of that pushed out of 1Q because of the market environment or was that all kind of planned that way, you're just notifying us of it?

W. Alexander Holmes - Chief Executive Officer

It was really planned that way. We're just notifying you of it. I would say that our marketing spend – there's parts of it that are rather fixed throughout the year. Other parts are more campaign focused and kind of variable on that. So, last year we kind of called out the same type of behavior, the number was different. I would say from a planning perspective, I would say first quarter was a little lighter than I think we initially anticipated. It doesn't necessarily mean that Q2 is necessarily proportionally higher, it's just the timing of that spend can vary a little bit by quarter, but I'd say that we were probably a little lighter this year than we thought. And I would say Q2 is where we thought we'd be, but it is significantly up not only sequentially, but it's actually up a little bit from last year as well.

Mike Grondahl - Northland Securities, Inc.

Got it. Okay. And then, just a quick question on digital, 23% transaction growth led to 31% revenue growth. If my recollection is right, typically transaction growth was higher than revenue growth. So, are you starting to take some price there? Why is 23% transaction growth now leading to 31% revenue growth?

W. Alexander Holmes - Chief Executive Officer

Yeah. There's a couple of drivers in there. I think certainly, we are looking more succinctly now at pricing on a corridor basis and also where we are. We're also getting much more international in our deployment of those services. So, when you're doing account deposit transactions, for example, you tend to have larger principal per transaction than you would in a cash transaction so that should lead to arguably higher profit and more revenue on a per transaction basis. Also, we did touch on kind of the Saudi, the Yemen-Saudi is a digital market for us at least with one of our agents. And so, we did lose some low revenue-per-transaction transactions on that. Also, we did see a bit of a slowdown in the U.S.-to-U.S. business in the lower band, also in our online service as well. So I think the net of that kind of pulls this together. But we are looking to be much more dynamic on pricing around the world and there are some opportunities in some higher RP corridors to do more in the digital space and we're capitalizing on that.

Mike Grondahl - Northland Securities, Inc.

Okay. Thank you.

W. Alexander Holmes - Chief Executive Officer

Sure.

Operator

And we'll go next to Bob Napoli with William Blair.

Robert P. Napoli - William Blair & Co. LLC

Hi. What is Walmart as a percentage of your business currently and I was wondering if you could break it out into what pieces were like the U.S.-to-international versus U.S.-to-U.S. versus bill pay and some of these other services that you provide?

W. Alexander Holmes - Chief Executive Officer

I think it was, what was it, 19% or 20%?

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

It was just under 20% on a reported base.

W. Alexander Holmes - Chief Executive Officer

It was under 20% on a reported which probably puts it 18%-ish or something on a constant currency basis because it's obviously the value, the strength of the dollar on the non-U.S. business. No, I mean, we don't, we're not going to break it out. It is a mix of U.S.-to-U.S. business, it's bill pay, it's money order, it is U.S. Outbound. We also have online with Walmart as well in that mix. So, yeah – no, I mean, more broadly than that, I would say we're having a very good start to the new contract with Walmart. We have a lot of exciting things going on with them. And I think the relationship is in a very, very strong place. So, we're very pleased with our start to the year. And we have a lot of things that we're working on them with whether that's improvements at the point of sale or focus on the customer experience. We're always working on technology enhancements, compliance enhancements and these types of things. So, we have a lot of dynamic conversation under way with Walmart and pleased with our start to the year.

Robert P. Napoli - William Blair & Co. LLC

Okay. And then just one quick small item. The cash flow and the working capital, the accounts payable continues to decline. So, you're getting – your working capital benefit is less favorable when it cash flows. Is that just a timing thing or is there something going on with part of your business that makes that then more of a permanent? The working capital today is where it should be or is there going to be continued declines in that accounts payable?

W. Alexander Holmes - Chief Executive Officer

No. It was all timing.

Robert P. Napoli - William Blair & Co. LLC

Okay.

Lawrence Angelilli - Chief Financial Officer, Treasurer & Executive VP

And there was also – we pay all our incentive comp in Q1 so there's usually – the first quarter has a big cash effect from that. But the working capital you're referring to, it was all timing.

Robert P. Napoli - William Blair & Co. LLC

Great. Thank you.

W. Alexander Holmes - Chief Executive Officer

Thanks Bob.

W. Alexander Holmes - Chief Executive Officer

I think we're just at the top of the hour and out of time. So, I want to thank everybody for their questions and participation, and have a great day.

Operator

That does conclude today's conference. We thank you for your participation. You may now disconnect.

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