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Executives

Eric Dutcher – Vice President, Investor Relations

Pamela Patsley – Chairman and Chief Executive Officer

Alexander Holmes – Executive Vice President and Chief Financial Officer

Analysts

Glenn Fodor – Morgan Stanley

Jim Kissane – Credit Suisse

Tien-Tsin Huang – J.P. Morgan

Robert Napoli – William Blair

Sara Gubins – Bank of America/Merrill Lynch

Kartik Mehta – Northcoast Research

Mike Grondahl – Piper Jaffray

MoneyGram International, Inc. (MGI) Q2 2012 Earnings Call July 26, 2012 9:00 AM ET

Operator

Good morning and welcome to the MoneyGram International Second Quarter 2012 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 open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Eric Dutcher, Vice President, Investor Relations. Please go ahead, sir.

Eric Dutcher

Thank you Jennifer. Good morning, everyone and welcome to our second quarter 2012 earnings call. With me today are Pam Patsley, Chairman and Chief Executive Officer; and Alex Holmes, Executive Vice President and Chief Financial Officer.

Our earnings release and accompanying slides are 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 the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from expectations, plans, and prospects contemplated in any forward-looking statements as a result of various factors, including those discussed in our filings with the SEC. I encourage everyone on this call to read our SEC filings, including our 10-K for the year ended December 31, 2011, and 10-Q for the quarter ended March 31, 2012.

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

Now, I'll turn the call over to Pam.

Pamela Patsley

Thanks Eric. Good morning everyone. Our business performed well in a challenging environment through creative business initiatives and disciplined execution by our global teams. We achieved impressive growth in sends originating outside of the US, and built upon our positive momentum from the first quarter, despite the impact of the declining euro, economic malaise in southern Europe and high global unemployment.

We are driving performance through double-digit growth in agent locations, money transfer transactions and money transfer fee and other revenue. In fact, we had the fifth consecutive quarter of double-digit constant currency money transfer revenue growth. Our expansion in fast growing alternative channels continues and that now represents 5% of money transfer revenue. Bottom line, we continue to outperform our peers in the marketplace and at the same time position MoneyGram for the future. This is a true testament to the strength of the MoneyGram team.

I now would like to turn to two foundational items that impacted the second quarter results. First, I’m pleased to report that last week we agreed terms on a proposed settlement in the shareholder derivative litigation in the Delaware Chancery Court. The proposed settlement has been submitted for approval to the court, and provides for an overall settlement at $10 million as divided among several of the defendants and certain other parties.

After taking into account the various parties contributions to the settlement, the company accrued $6.5 million for the quarter related to this proposed settlement in addition of course to associated legal expenses. As you may recall, the litigation related to our 2011 recapitalization transaction, which allowed our largest investors THL and Goldman Sachs to convert their Series B preferred stock interest into common stock and common stock equivalents.

We all know that this is a positive transaction for MoneyGram as evidenced by the overwhelming vote of support, 94%, from the unaffiliated shareholders. While we would have preferred no litigation at all, we feel this settlement is a good result which enables the company to avoid future costs and put this matter behind us.

The second is our ongoing investigation in the matter before the US district court for the Middle District of Pennsylvania. As you know from the earnings release, we accrued $30 million in connection with a possible resolution of this matter based upon facts and circumstances we know today. We continue to engage in discussions with US government representatives, and our goal is to resolve this matter as soon as possible and with the best solution for all stakeholders. That said, we can’t predict the ultimate outcome or potential losses that may be associated with this matter, and we can’t predict whether they will be other remedies or penalties.

I can say that we continue to dedicate significant resources towards obtaining a resolution in this legacy matter. This investigation is about MoneyGram’s consumer antifraud program from 2004 to early 2009. I have said this before, but it bears repeating now, MoneyGram continually intensifies its efforts to thwart fraudsters, and we partner with law enforcement and other agencies like the Federal Trade Commission to provide information and assist in the arrest, indictment and prosecution of criminals.

We continue to invest in compliance systems and programs and use best in class technology to detect fraud. Our efforts in these areas have been recognized by various regulators and law enforcement agencies. You know that our services and products are used by millions of people around the world that handle important and sometimes critical needs in their lives, and from a business perspective just in the US alone there are over 14,000 small to medium-sized businesses, where MoneyGram products are an important part of their revenue stream. Few things anger us more than when people use our service or really the service of any other money transfer company to engage in illegal activity.

I can assure you that the MoneyGram of today is committed to leading the industry in our antifraud effort and we remain vigilant in this regard. Now with that said, let us turn back to our great operating performance in the quarter. We reported total revenue growth of 7%. Top line performance was driven by very strong money transfer volumes, and an improving bill payments business.

Money transfer constant currency revenue growth was 13% on the strength of 13% transaction growth and we had all three major categories showing double-digit growth. We also performed well on the bottom line. Our adjusted EBITDA of $68 million was 7% higher than the prior year. Our adjusted EBITDA margin of 20.7% was flat year-over-year despite the lower interest revenue and the euro impact. Given these two items we are pleased with our margins, and Alex will provide more details on this later.

MoneyGram continues to focus on two strategic areas, expanding our network and growing alternative channels, which includes an aggressive roll-out of self-service solutions. In both of these areas we had another good quarter. News agent signings and activations increased our locations to 284,000 worldwide. This is 16% growth over the prior year. Our alternative channel revenue grew 59% over the prior year, and this important channel as I said now represents 5% of total money transfer revenues. This growth is especially impressive given the heavy discounting and giveaways pushed by your competitors this quarter. As you know, our alternative channels focus on online remittances, virtual agents, kiosks, and ATM–based services, as well as consumer directed services like cash-to-account.

Now taking a closer look at our money transfer business, US to US, US outbound and sends originated outside of the US, as I said, all increased by double digits. I’m particularly pleased with the way the business strengthened during the quarter. April results were weaker than expected, especially for US to US and US outbound, but good May and June results brought the business back in line for the quarter. In the US the US business, we generated 10% transaction growth. This is strong growth, especially considering it was [stacking] on top of one our highest growth quarters in Q2 2011.

Revenue growth was also 10% as pricing held steady in this important quarter. The US outbound business also had a good quarter reporting transaction growth of 11%. US to Mexico led the way with a 19% increase in transaction, and this impressive growth wasn’t through deep discounting as our revenue growth was solidly in double digits. Our growth was particularly impressive given the competitive environment.

In Mexico though, we have over 15,000 locations through relationships with Wal-Mart, Coppel, Soriana, FAMSA, Calimax, [Merco], Bancomer and Banorte. Elektra of course was a fantastic addition to our retail network, but I think our great results show our brand strength – that our brand has strength across Mexico in all points of distribution.

The US to Latin America growth rate was slightly weaker than in the first quarter. Sends to India were particularly strong as we continue to activate more locations within India Post and State Bank of India. Fuelled by our targeted marketing campaign, we had good performance in sends to the Philippines. Finally our agent growth in Africa helped the overall business expand, particularly robust were US [orders] to Nigeria, Kenya and Liberia. We continue to focus on increasing the received network locations for our strong US agent base and there is a long runway of future growth for US outbound.

Speaking of US outbound, we are pleased to announce that consumers can now send money transfers to nearly 200 countries on walmart.com using MoneyGram. Last year we launched the service for US to US on walmart.com. Now we have expanded that to include US outbound. We look forward to driving growth through this new co-branded solution offering compelling products to consumers.

Turning to send transactions originated outside of the US, growth accelerated to an outstanding 18%. This was our eleventh consecutive quarter of double-digit transaction growth. We actually tied our highest transaction growth since 2008 despite the – grow over challenger and in light of the current softness in Europe. France, Russia, Saudi Arabia and several African countries had a particularly good quarter. This was offset by continued weakness in Greece, Italy and Spain. While Southern Europe is still challenged, we did see some positives in the quarter.

Both Spain and Italy recorded transaction growth in the quarter. Revenue was still down year-over-year due to lower face value sends and the mix of [received quarter pairs] was more heavily weighted towards lower revenue per transaction locations. We are encouraged by the transaction growth we saw in June in this challenging European economy.

Now let us review some of the regional trends for this business. Western Europe produced especially good results in France and Germany. Over the past 12 months we added over 1000 locations in France, and sends have increased to quarters all over the world. In the first quarter, we highlighted the strength to francophone Africa, but we have also seen fantastic growth in sends to India, China, Haiti and Pakistan. Operations in the Iberian Peninsula improved as Spain and Portugal added to their network. In Spain we added 1000 retail locations in the quarter.

As mentioned, this led to the transaction growth. In fact we had our highest transaction growth in Spain in five years. That is encouraging. In Portugal, we began the roll-out of Continente. That is the leading retailer in the country with 140 locations, and they have over 180 million visits per year. We are pleased to have them as a MoneyGram agent, and we are nearing the halfway point of our rollout.

Eastern Europe, the CIS and Russia drove transactions and revenue growth. We launched Credy Banka in [Serbia] with 600 locations, signed a new agreement with Payzone in Romania, which will add 400 locations, and signed key agent extensions in Bulgaria and Albania. Sends from the Russian Federation continued their rapid pace. New marketing campaigns supported the region in the quarter. An advertising campaign on skype was the first of its kind in Russia, and had over 33 million impressions.

In Ukraine and Poland MoneyGram supported European football with extensive marketing around Euro 2012. Also in Ukraine we signed UniCredit Bank with over 400 locations in the country. Lastly we opened service in Bosnia increasing our countries served. We are very excited about MoneyGram’s current results and future prospects in the region.

In the Middle East, we again delivered impressive growth. Saudi Arabia has grown sends to the Philippines, India and Pakistan. We also had great growth in Bahrain and Libya. In fact our business in the Libya to Egypt corridors doubled from first quarter to second quarter. In July we activated a new country in this region, South Sudan. South Sudan has a population greater than 8 million. Receives will enter the country from the US, Europe and other African nations.

In the Asia-Pacific, much of the effort was focused around our alternative channels. In conjunction with our partnership with ICBC, we launched cash-to-account from Japan into China. Our growth in Japan has simply been phenomenal and this is just another opportunity to grow that Japan business. In China, we added the Australian dollar as an option so customers can now send or receive in four currencies.

Many of our regional agents were extended in the quarter with key renewals in Thailand and Vietnam. The renewal with Vietcombank opened 400 locations, which were receives only and now will add sends capabilities. Australia slowed slightly with fewer student in the country, who had been driving growth in the Australia to India corridor; however, our Kiosk business with 7-Eleven continues to be strong, which nearly doubled the business from second quarter 2011. Our self-service solutions continue to propel growth in this important region.

India maintained its rapid growth. Our India Post network roll-out is ongoing, and we are now in over 2000 India Post locations with a presence in almost all states and union territories. India is now our third largest received market, yet represents less than 0.5% of our money transfer transactions. Given that India is the world’s largest received market I see a tremendous opportunity for growth for MoneyGram.

During the quarter we also signed an agreement to offer services at National bank Limited in Bangladesh. This bank has over 150 locations and focuses on rural or SME business, and even has locations offshore. Growth in Africa remained stellar. The France to Africa corridor continues to be very active. Additionally we have great results in intra-Africa and Africa to China remittances. In Ghana we added nearly 500 locations with ARB Apex Bank, and in Nigeria we added over 530 locations with Ecobank Nigeria. Additionally we added two other agents with a total of 100 locations in Morocco. We will persist in expanding our presence across the continent.

With all of the fantastic effort in extending and expanding MoneyGram’s services around the world, it is easy to see why we achieved 18% transaction growth in sends originated outside the US. To continue with great news let us look at the bill payment business. Last quarter we shared that for the first time since the second quarter of 2008, excluding divestitures, we saw our bill payment transactions grow. This quarter I’m pleased to report that we saw revenue growth as well. Excluding the PropertyBridge divestiture, transactions grew 7% with revenue growing slightly.

On a reported basis, bill payment transaction volume decreased 3% and fee and other revenue decreased 6%. Through our business development efforts and some moderating of the credit market several of our consequent payment industries are recovering. During the quarter we added another 400 billers to the network. We also expanded our prepaid phone top up services. From the US customers can now top up their prepaid phones in several countries, including Brazil, Panama and Paraguay through the addition of new billers.

Over the past several quarters, we have announced multiple partnerships for alternative channels in bill payment. Partnerships of Fiserv and ZipZap are reaching a new set of customers and are having a meaningful impact on the bill pay business. We are pleased with the revenue growth in the quarter, which comes despite the fastest growing categories in bill payment having the lowest revenue per transaction. We do not believe we have completely turned the corner to sustain revenue growth in bill pay but we are definitely one step closer and on the right path.

Looking specifically at alternative channels in our money transfer business, again this business, representing 5% of money transfer revenue, grew 59% in the quarter. As you know MoneyGram Online is the largest business in this category. MGO grew transactions 27% in the quarter, but revenue 37%. This is especially impressive pricing power given the heavy discounting in online remittance transfers that we see from competition.

We continue to sign new partnerships to drive our alternative channel business. For example, in July we signed an agreement with Program Manager, First California Bank. FCB manages hundreds of cards programs that reach millions of consumers. This agreement allows for top-ups and will enable FCB to be a virtual agent for money transfer. The virtual agency is an integrated solution with the consumers’ online accounts. The integration makes transactions easier for the consumer but also reduces cost and risk for MoneyGram. Stay tuned for more exciting news in this area and broadly in the alternative channel area.

Now I will turn it over to Alex, who is going to walk you through the financials.

Alexander Holmes

Thanks Pam. We produced great financial results in the quarter, so let’s take a look. Total revenue increased 7% to $330 million, driven by the strength of our core money transfer business. For the quarter, investment revenue was $3.4 million on an average investable balance of $3.1 billion versus investment revenue of $5.9 million with an average investable balance of $3.3 billion in the prior year second quarter. As mentioned in the first quarter, our investable balances have stabilized over the past several quarters, and we are still seeing yielding modest revenue growth in this low interest rate environment.

During the quarter, total reported operating expense increased 19% over the prior year. As Pam mentioned, during the quarter we recorded accruals and expenses for the MDPA and Pittman matters. In total these matters represented $40 million of expenses that are included in the transaction and op support line.

On an adjusted basis, total operating expense increased 6%, driven by increased commissions’ expense in conjunction with revenue growth. Total commission expense was $147 million, or 44.5% of revenue, compared to 43.8% in the prior year. At the consolidated level, commission expense as a percentage of revenue will continue to increase as money transfer becomes a greater portion of our overall business.

Money transfer commissions as a percent of revenue were flat year-over-year as the team has done a nice job managing commission rates. Excluding commissions, on an adjusted basis, transaction and op support increased $2.4 million, while compensation and benefits increased $2.2 million. This increase was driven by increased investments in compliance and regulatory oversight as compared to last year.

Marketing expense as a percentage of total revenue was down slightly at 4.7% of total revenue compared to last year. For the full year, we still anticipate total marketing expense as a percent of revenue to be in the range of 4.5% to 5%. Historically, the second quarter has had higher marketing expense for Mother’s Day and Easter campaigns. In the third quarter of this year we expect a several million dollar increase in marketing expense as compared to last year to support our global rebranding efforts and campaigns for Moneygrado, ICC Cricket, and Ramadan.

Reported EBITDA for the quarter was $21.9 million. On an adjusted basis, EBITDA was $68.5 million, a 7% increase over $64.2 million in the prior year. Adjusted EBITDA margin in the quarter was 20.7%, flat compared to the same period last year as a result of $2.4 million of lower investment revenue and $1.9 million for the declining euro against the US dollar. As mentioned, margins will also fluctuate throughout the year due to the timing of marketing expense in other investment initiatives.

Restructuring and reorganization cost in the quarter were $4.3 million. It comprised of $2.3 million of transaction and op support, $1.3 million of severance, and $800,000 of occupancy, equipment and supplies. As a quick reminder, there is a slide in our quarter summary on the website which breaks restructuring and reorganization costs into their corresponding categories.

We remain on track to wrap up our restructuring activities in 2012 and deliver on our anticipated run rate savings of $25 million to $30 million exiting the year. During the quarter, depreciation and amortization was favorable about $1 million compared to the prior year period. On an adjusted basis, operating margin improved 70 basis points to 15%, while reported operating margin was only 1%; this was mainly due to the aforementioned accruals and expenses for the MDPA and Pittman matters. Book income taxes were $10.2 million, and our tax rate was consistent with lost quarters. Cash taxes were about $700,000. As you are aware, we are reviewing our long-term tax strategy option, and also working towards a resolution of our tax dispute with the IRS.

Diluted loss per share in the quarter was $0.35 on diluted shares of 71.5 million. This included a negative impact of $0.54 from the legal accruals and expenses, as well as a negative impact of $0.04 from restructuring and reorganization costs.

In the quarter, free cash flow as defined as adjusted EBITDA, less cash interest, cash taxes, purchases of property and equipment, and signing bonus payments was $38.7 million, or 11.7% of revenue. Last year’s free cash flow in the quarter was $22.9 million or 7.4% of revenue.

Capital expenditures in the quarter were $11.7 million. Capex was lower due to higher investments last year related to an equipment refresh, but will increase somewhat throughout the remainder of this year as we invest in compliance and other activities. Signing bonus payments in the quarter were about $1.4 million. As you know, signing bonuses tend to be lumpy, and Q2 was definitely on the low end. However, we expect this number to increase substantially in the second half of the year as we close on several agent contracts.

In the press release we provide table 7, which shows the walk from adjusted EBITDA to free cash flow for current and prior periods. We obviously continue to focus on free cash flow generation to invest in the business and pay down debt.

Turning to the balance sheet, during the quarter we again saw the positive results of our refinancing and claw back efforts with interest expense favorable $5.2 million on a year-over-year basis. We ended the second quarter with assets in excess of payment service obligations at $269 million, up from $224 in the first quarter of this year. As mentioned on previous calls, we have been keeping a sharp eye towards the right timing of refinancing the remaining $325 million of our 13.25% second lien Goldman Sachs notes. As a reminder, the first call date without a full make-whole premium for these notes is in March of 2013.

Turning to the segments, total revenue for the Global Funds Transfer segment increased 9% led by strong money transfer constant currency revenue growth of 13%. The segment reported operating income of $38.6 million and an operating margin of 12.5% in the second quarter of 2012, up from 9.1% in the second quarter of last year. On an adjusted basis, operating margin increased to 14.3% from 11.9% in the prior year.

Finally turning to the Financial Paper Products segment, total revenue for this segment during the quarter declined 16% to $21.5 million with operating income of $8 million. Reported operating margin was 37.5% and 39.8% on an adjusted basis. Segment margin benefited from a lower rate of decline in investable balances and other cost reduction efforts within the business. Financial Paper Products’ revenue represented 6.5% of total revenue in the quarter compared to 8.3% last year.

And with that I will turn it back to Pam.

Pamela Patsley

Great. Thanks, Alex. As you saw in our press release for the six months ended June 2012 total revenue of $648.2 million increased 7% year-over-year, and adjusted EBITDA increased 10% over prior year to $136.8 million. We continue to estimate total revenue growth for the full year of 7% to 9%. Today the euro is about 15% lower to the dollar than it was one year ago.

As such adjusted EBITDA growth for the full year is now estimated to be 7% to 9%. Excluding the devaluation of the euro against the US dollar, our outlook for adjusted EBITDA is unchanged. We have great momentum in our money transfer business, and our efforts in bill pay are yielding excellent results. We continue to focus on generating free cash flow.

It is clear our brand awareness is strengthening and our message of value, trust and security resonates with consumers around the world. Everyday we facilitate the movement of hundreds of millions of dollars on behalf of consumers. We are a company that consumers rely on for their financial needs. With this position and message the MoneyGram team is energized, competitive, and ready to win. I look forward to sharing our progress with you throughout the year, and thanks as always for your time and your interest this morning. And with that I will turn it back to the operator to please open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will take our first question from Glenn Fodor with Morgan Stanley.

Glenn Fodor – Morgan Stanley

Hi, good morning. Just a quick question on the severance, it looks like a big number for someone who is terminated for cost. So I was wondering if you can comment on that, and this has definitively put to bed 100% of all the lingering personnel issues related to this situation.

Pamela Patsley

Okay. I’m not sure which person terminated for cost that you are referring to?

Glenn Fodor – Morgan Stanley

Well, you have said in the footnote that this was for executive termination.

Alexander Holmes

Yes. They were two kind of agreements that went through the quarter, and actually kind of a third overlap, if you will from…

Glenn Fodor – Morgan Stanley

Okay. It was more than just one…

Alexander Holmes

There is a blend of a couple in there.

Glenn Fodor – Morgan Stanley

Okay, fine.

Pamela Patsley

And we 8-K-ed one. We 8-K-ed one departure and there was no severance.

Glenn Fodor – Morgan Stanley

Okay. That was the one I was mixing up. Then okay thank you for that. I appreciate it. And then the 30 million for the Pennsylvania investigation, this was a lot higher than we expected, especially considering it is almost double what the FTC’s fine was, I mean could you just talk about how these agencies are coming to such, you know, vastly different remediation requirements for what I believe is pretty much the same complaint?

Pamela Patsley

Yes. They are looking at essentially the same period, the same agents, and quite honestly Glenn I wish they were a formula or a recipe to apply here, and unfortunately there is not. We remediated quickly with the FTC. They used that $18 million to go back to consumers, who were victims, and presumably that we would like the same to happen in this case. But you know, it is a lot of money, and so together that puts it at $48 million.

Glenn Fodor – Morgan Stanley

Okay, then just final -- great. Thank you. Just a final last question, depending on what measure you use it looks like housing has been getting a little bit better, again that is pretty variable, but overall the trend is upwards. So would you say you are seeing some of that in your latest results, and what have you assumed for this metric in your guidance?

Pamela Patsley

I think. You know I don’t know that we assume any particular housing metric per se, but we look at all the things you know, jobless, claims, unemployment, construction, we kind of take it all together, and so I don’t think you know we have any assumption of a return to a robust economy in any corner of the world.

Glenn Fodor – Morgan Stanley

Okay, great.

Alexander Holmes

Just to add to that, I think if you kind of look at the Mexico corridors, particularly if you look kind of where the growth came from, it was pretty dispersed around the country, and a lot of solid growth in various different pockets. You know, you go to some place like Las Vegas where there has obviously been a big slowdown in housing, you know, and growth there has been pretty anemic for a while. You know, I don’t think depending on where the growth has been where there is some construction coming back, that certainly is always good for the business, but certainly I think in some of those long-term places where there was big development I think you know there are still some time to turn around coming there.

Glenn Fodor – Morgan Stanley

Thank you. I appreciate it.

Pamela Patsley

Thanks Glenn.

Operator

We will go next to Jim Kissane with Credit Suisse.

Jim Kissane – Credit Suisse

Hi Pam and Alex. Alex, just a question on the guidance, can you discuss maybe the euro dynamics, you are holding the revenue growth, but you are lowering the EBITDA, I would think revenue would get hit as well. So is there an offset there?

Alexander Holmes

Yes, there is a little bit of an offset. I mean certainly the top line is being hit by the euro. I think at the end of the day that is a pretty -- it is a much larger denominator than on the EBITDA line up. That is one issue. You know, if you think about the dynamics of the euro revenue that we’re generating, we have a little bit of an offset obviously with commissions expense, and then we have some more offset that is related to some headcount, some marketing expense and little bit of facility expense within the region.

But if you think about the size of that market, and you look at the pure translation on the profit itself, you also look at as we talked about on the call some declines in RPT, you know, and you know some of your traditional corridor is slowing down a little bit, you know, we’re just not seeing that volume flow through that we normally see, and that is hitting the bottom line pretty hard. It is really just kind of that pure translation right now.

So I think on the revenue side we have also seen FTP doing much better than I think we anticipated, particularly on the money order side. Bill pay is a little bit ahead of where we thought it would be. So you know the US side of the revenue we are getting a little bit of balance there, but obviously we’re not driving as much -- nearly as much profit from FTP or bill pay as we would be from a European transaction, and so I think those don’t really offset on that -- on the bottom line.

Pamela Patsley

No. I would just say and part of it Jim is just the math, you know, you have a bigger denominator in total revenue to diffuse the impact of the euro again versus adjusted EBITDA from higher growth, higher RPT and higher margin business kind of you know falling through.

Jim Kissane – Credit Suisse

Got it, and that is helpful. And then Pam, maybe talk about the sustainability of the strong performance in US to Mexico, you are obviously outpacing your competitor, is there some risk that the regulatory challenges impacting your competitor will start to catch up to you, or come your way.

Pamela Patsley

Yes. That is a great question and so I think what you already heard was number one, the growth did not come from discounting. So we will take that. And as it relates to regulatory issues, you know, I would start with we have a network of now over 15,000 locations. Not quite twice, but getting close to almost twice as much for just one of the other large brands when you exclude one of their subordinate brands that they are I think moving away from.

So it is you know that is very important. I think we’ve had a lot of key signings on the send side. We have focused on marketing. We have better FX management, or are improving FX management for MoneyGram, I’m not saying against the industry, but that has been something we have done to enhance our service for that corridor. And we are attracting new customers and we have focused as you have heard me say many times on the service aspects on the received side.

It think again specifically with regard to the regulatory environment, you know, we already have in some measures, our legacy has been a higher level of scrutiny long-term for ID requirements and other things like that. So, you know, we have already kind of been doing that and that's just been within our history that they are today. So we haven't taken any more aggressive posture. In fact I think you know, our broad AML compliance and agent monitoring has continued to just step up.

I would say you know, we are not defensive on our Mexico business growth at all. We think we have everything well in hand, and I think what's important to note that our growth as I said it didn't come from discounting. Our growth is also not concentrated in what one would call that Southwest border alliance send area. You know, we’ve had growth accelerate across many, many, many DMAs all across the country and so it hasn’t been you know, if know you would kind of say it's coming to us because someone else you know, that's just not the case.

Jim Kissane – Credit Suisse

Great, and if I can get one…

Pamela Patsley

(Inaudible)

Jim Kissane – Credit Suisse

It is excellent. If I can get one last one. It seems like after four years your bill pay business has hit an inflection point on an adjusted basis the revenue you doubt some growth. So it would seem like again you hit an inflection point but you are sort of hedging on your ability to sustain the growth going forward. You know, maybe kind of discuss that a little bit.

Pamela Patsley

Well, I think and we're talking about that hedge being on a very short term, near term basis. I think you know, we all have some internal discussions in that and what will happen for the third quarter, but as you said it was slight -- as we told you a slight revenue growth, excluding the PropertyBridge divestiture for Q2.

We had a very strong third quarter last year in terms of new signings and some other things and when we look at how the weekends layout and the Fridays for bill pay, you know, we're just a little hesitant to say that you know, the third quarter will come in there. I'm not going to -- no, we are pushing.

Jim Kissane – Credit Suisse

So it's more technical issues you think over time is back on the growth trajectory.

Pamela Patsley

Yes, there's nothing we see from the fundamental it's just more kind of math really.

Jim Kissane – Credit Suisse

All right, perfect. Good job, thanks.

Pamela Patsley

Yes, thank you.

Operator

We’ll go next to Tien-Tsin Huang – J.P. Morgan.

Tien-Tsin Huang – J.P. Morgan

Hi thanks, obviously you taking all the shares, that's great. I -- just following Jim's question just thinking about the sustainability of some of these, these share gains, I mean, how much, you know, how much more is there to do to potentially take share and I'm curious maybe if also you could just rank for us Pam what's driving the share gains I get the regulatory stuff but what else is helping?

Pamela Patsley

Okay, great question. So on first how much more is there to catch. We still haven't crossed just taking one corridor that was just discussed US to Mexico we still haven't crossed 10% market share there. We are getting real close. We have it for a goal, but so I would say again just the math would say we've got plenty of room for continued growth there, and then overall world over we have just you know, tremendous growth.

I told you, you know, India world’s number one received country and it is less than 5% of our received today, again just another example. So, but you could look to our total market share of 5% and, you know, an industry that's growing somewhere around you know, World Bank 7-ish% and we're clearly, you know, trying to be double that where we can. So I think we've got a lot of runway and I think we also as we've said you know, 11 consecutive quarter on this metric, or fifth, you know, on this. I think we also have some good empirical evidence to say we are keeping the pedal down.

Tien-Tsin Huang – J.P. Morgan

Got it, and then on the factors that are driving it beyond the regulatory.

Pamela Patsley

Yes, I wouldn't say regulatory is driving our growth .

Tien-Tsin Huang – J.P. Morgan

Forgive me. Yes, you know, I mean, obviously watching these spaces and these regulatory issues, you said that pricing is not driving it. So what else is there in your mind that is incremental?

Pamela Patsley

Well, I think again it's a little bit you know, we think we have a great brand and message. We think we have a value -- well, we know, we have a value proposition to the consumers and one that comes with you know, a strong message bringing them closer, bringing the consumer closer to whatever their need is, whether it's paying a bill or sending money to a loved one, and our focus in working with our agents in getting that message out and kind of you know, street corner marketing initiatives is paying result.

I love the word focus. I mean, we are very, very focused. Our regional teams, our product teams and so everybody has got their tasks, their mission and they're off executing, and I think we have kind of worked aggressively to you know, we're certainly not at end of job but continue to work on, you know, the headquarters if you will, the engine to accommodate and facilitate the focus from the field on gaining share. So faster product roll out, more product innovation, targeted marketing, focused marketing message for corridors, and alignment with the received folks with the send folks.

Tien-Tsin Huang – J.P. Morgan

Got it, and that's good stuff. So just last one from me, just from the, you know, the outlook on regulatory compliance costs rest of this year and next year. Any changes on the horizon there Pam or Alex?

Pamela Patsley

So you must be thinking, I will guess, you're thinking Tien-Tsin with CFPB at the back or forefront of your mind, and as we’ve said we have included in our capital spend the developments needed this year to be in compliance the first of February 2013 when the CFPB will take effect and so that project is continuing. We are on track. We're doing most of that in-house, and as far as a run rate effect to that initiative, you know, we don't see a huge increase. I know you might have heard others talk about forms and other things. You know, it’ll just be part of our process. We don't have huge inventory we are going to trash or anything like that. So --

Tien-Tsin Huang – J.P. Morgan

No. That is helpful.

Alexander Holmes

You know, I mean, I would say you know, just generically speaking, you know, we continue to invest in compliance. You know, we are adding people, you know, improving systems, continue to focus on that. We want to be best in class, you know, across the board not only in fraud prevention but obviously AML compliance standards you know, around the world adding people in the field these sort of things, and those I think we’ve been doing that for the past couple of years, and we will continue to do that going forward but, you know, to Pam’s point nothing specific as it relates to the offering.

Tien-Tsin Huang – J.P. Morgan

Okay, great. Nice job. Good growth. Thanks.

Pamela Patsley

Thank you.

Operator

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

Robert Napoli – William Blair

Thank you. Good morning. On the -- little more color maybe the growth of sends outside the US obviously pretty impressive continuing 18%, and you talked about Pam about a lot of different markets and they're doing well but can you size that a little bit and you know, where are the numbers the biggest that are driving that growth and I mean, that growth I think actually accelerated a little bit this quarter. Are you going to -- do you see it continuing at those types of rates in the near term.

Pamela Patsley

Well, I think, you know, you know that we have rallied our teams around double digit kind of double-digit everything. So that is a different message to you than you know official forward-looking outlook or estimate. You know, and I guess Bob in terms of ranking again, I know you all have heard me say this, I just, you know, we have the world divided up and I wouldn't want to say any one part is more important than another, and, you know, and so much of it has to work together on the send and receive corridors, but I see no corridor where we are nearing “end of job.” I mean, we're just not. So, 5% global market share, number two player, I love it. I think we have a fabulous runway for growth.

Robert Napoli – William Blair

Okay, then maybe, I mean, kind of interesting you said that April was weak and then you know, May and June looked better. It is July. So the trend looks stable.

Pamela Patsley

You know, what I see on daily you know, a daily transaction report July, you know, would kind of continue and just, you know, it looks good. It doesn't look April like, and we don't really know what the anomaly was in April.

Robert Napoli – William Blair

And then what percentage of your revenue is in euro zone I guess. As we think about constant currency and, you know, is the growth rate of that euro zone the same as…

Alexander Holmes

You know, it's around you know, kind of in the 20% range of money transfer revenues and, you know, I guess you know, from a broad perspective looking at European markets, I mean, you know you can even throw obviously trade in the pound, but you can throw the UK in there. You know, certainly there is a lot of high RPT corridors in there, you know, higher face amounts. You know, really particularly when you compare that to the United States or compare that to the Middle East for example.

So, you know, very important markets for us. Those are, you know, probably you talk about FX. I mean, we don't generate you know, nearly as much FX revenue as we obviously did you know, many years ago. I mean that's just, it's fairly industry standard these days but you know, at the end of the day, I mean lot of those corridors still drive more of that FX revenue than other channels do, and, you know, it's obviously the concentrated piece of our business pretty important and so you know, when the euro goes down I mean, you know, we're normally used to some fluctuation.

It goes up a bit, it goes down a bit, and that just kind of flows through but obviously you know, the decline here particularly as we saw the euro start to go down, May, June, and obviously where it is in July I think it's sort of beyond where anybody at least sitting around the table believed it would be at the beginning of the year.

Robert Napoli – William Blair

And then last one, Pam you talked about MoneyGram Online and I think you said it was the largest business of its kind or something like that and you threw out…

Pamela Patsley

No, no, no, I said it's the largest element when we collectively talk about our alternative channels now being 5% of you know, total money transfer revenue. So it's growing on a growing denominator, the single largest component when we look at kiosk and all these other things of our alternative channel business is MoneyGram Online.

Robert Napoli – William Blair

Okay, and then you said it was growing 37%. I know you moved it into at least the UK.

Pamela Patsley

Yes, we launched the UK late February, early March and then we have the US, we have several affiliate programs, one new affiliate program that just launched this week what I mentioned US outbound with Walmart.com and the 37% was revenue growth on MoneyGram Online and 27% transaction growth for the quarter.

Robert Napoli – William Blair

Thank you.

Pamela Patsley

Yes.

Operator

We’ll go to Sara Gubins with Bank of America/Merrill Lynch.

Sara Gubins – Bank of America/Merrill Lynch

Thank you. Maybe just following up on that on Wal-Mart, I know, I think that you signed [two] with Walmart.com in November and I'm wondering how that’s ramping.

Pamela Patsley

Our US to US that we launched, it was in October and that's like doing great, doing very, very well. I mean, it is a compelling proposition to consumers. One that they find easy to use, great price point, and it's growing. We look more of the same certainly now with US outbound.

Sara Gubins – Bank of America/Merrill Lynch

Following up on that a little bit the Wal-Mart contract is of course up for renewal early next year, and I believe there is an evergreen component to the contract that if is not renewed in the next couple of weeks it would be extended for a year could you just give us any update that you're able to on it?

Pamela Patsley

Yes, well if I have something definitive I would have said it. So, you know, because that contract was you know, filed and described in ’08 when it was renewed right before the recapitalization event. You know, that's out there. I guess I would just frame it that when they’re renewed you all will be first to know, and we continue to work everyday to earn our relationship and continue to grow our relationship with Wal-Mart.

Sara Gubins – Bank of America/Merrill Lynch

Okay, and then separately there wasn't any -- it looks like there wasn't any negative impact in pricing in the quarter with money transfer transaction volume and constant currency revenue flat, which is different from what we have seen recently. Could you talk about what impacted that and how we should think about it going forward?

Alexander Holmes

Yes, no, I think you know, I think what we talked about some of the declines, you know, certainly on a currency transaction basis, on a constant currency basis we obviously saw that decline in some RPTs across southern Europe. In a few other countries that was offset by some improvement actually in the US market and the US outbound market you know, across-the-board.

So I think you know, we're seeing a little bit of that blend through. We certainly continue to balance in our portfolio a mix of new corridors obviously as, you know, places like Middle East, parts of Asia-Pac, Latin America, (inaudible) and other places continue to ramp up. You know, we see a different mix of corridors there that are priced in different spots.

And so certainly it becomes a balancing act as you go across. So, you know, we're beginning to see you know, concentration growth in certain markets. You know, Japan is up and running that's beginning to become you know, a meaningful piece. We got Saudi Arabia which is kind of on the other end of the spectrum, you know, the much different RPT.

So it's balancing out pretty well but I think, you know, globally we found some spots where we've been able to you know, change some prizes for the positive. There is other places where we have to remain competitive, and you know, tweak your prices but I think if you blend it out probably pricing is probably about 0.5% you know, mix was kind of favorable and you know, it was -- it netted out very favorably for us and continues to be that way for the past couple of quarters.

Sara Gubins – Bank of America/Merrill Lynch

Okay, thank you.

Operator

We’ll go next to Kartik Mehta with Northcoast Research.

Kartik Mehta – Northcoast Research

Good morning Alex and Pam. Pam in the press release in one of the statements you said you were able to perform well because of creative business initiatives, and obviously there wasn't pricing based on the results you put out. Can you just talk about maybe what you've done and what you meant by that to really help this quarter’s performance?

Pamela Patsley

Yes, I think, you know, I wouldn't say that “was unique to this quarter.” We could have said that same statement quarters ago, and we could say it in the future I hope that that will be fundamental to the way we run our business and that is we want to partner with our agents, and we want to be very responsive to our consumer’s need. So whether it is on you know, rolling out new products, adjusting marketing initiatives to resonate specifically for corridors or whatever.

I think, you know, all those things, you know, you look at what we've done with our Moneygrado campaign in the Philippines as if for instance (inaudible). And, you know, we've been working on the send side for the Philippines. So all things working together maybe, you know, to me that was and particularly when I look across the industry you know, the way we are aligned and focused I think that's some creative initiative.

I love our Skype you know, impressions and, you know, the advertising in Russia on Skype as a way to get at a community. So listening to our teams on the ground, listening to our agents you know, where you get the best ideas.

Kartik Mehta – Northcoast Research

And Pam, you also said you have some opportunities for you as agents and I'm wondering would these be competitive takeaways or would these be merchants that have never been money transfer agents, and now are looking for say maybe a new fee income?

Pamela Patsley

Well, I think we know this is you know, and that is what I said also in that one part. You know, just in the US alone, not to take anything away from our large agents, but particularly small businesses across the country rely on you know, MoneyGram’s product and services as a significant part of their revenue stream.

So that's a pretty compelling proposition particularly in a time when maybe their underlying business is feeling some pressure. I'm not sure to the first part of your question exactly Kartik what you're referring to I said but well you know, I can just tell you we are focused on growing our business everywhere. You know, we've added new countries, Bosnia, South Sudan. We continue to you know, whether large or small all corners of the world we want to grow, whether it's in New Zealand or Chad or wherever, you know, those are places that we are going to focus on growth.

Kartik Mehta – Northcoast Research

Thanks Pam, and then just as a final question. For you at the Mexico, obviously transactions you said up 19% but revenue was up double digits and I'm wondering, is the difference here something like 19% transaction growth and 15% revenue growth or is there a wider spread between transactions and revenue.

Alexander Holmes

You know, I think you are in the ballpark. It's definitely not a widespread.

Kartik Mehta – Northcoast Research

Thanks Alex, I appreciate it.

Alexander Holmes

You're welcome.

Operator

We’ll go next to [Robin Neal] with Goldman Sachs.

Unidentified Analyst

Great, thanks. I just got one on pricing.

Pamela Patsley

I'm sorry, [Robin] you’re really hard to hear.

Unidentified Analyst

It is hard hearing?

Alexander Holmes

Yes, that's better.

Unidentified Analyst

A little better.

Alexander Holmes

Yes, great.

Unidentified Analyst

Okay. So just a question on pricing. Good commentary in the quarter and obviously in key corridors, but as you look at the global opportunity that you had in US there, are there any regions or quarters where (inaudible) compared with the pricing.

Alexander Holmes

Yes, no. I think there is always opportunity for that. I mean, you know, what's kind of interesting I think as you look at our results and just the online for example, you know, as we look around at some of the initiatives we are doing there, we're seeing a lot of you know, kind of zero dollar fee type services and other offerings, trying to drive consumers get account based kind of services going and these sorts of things.

And, you know, I think a lot of those promotional ideas are interesting. You know, we certainly kind of look at those in the balance that off against what we think is just kind of a different better business model, different way of looking at the consumer. Certainly, you know, there is competitive dynamics in different corridors. You see overnight pricing in some markets as certainly some things that we've done to look at you know, how can you, you know, match our service a little bit better against some competition you know, rollout an overnight service, keep your price little bit lower and then actually maybe increase your price on your same day service, and so those are some dynamics you put in there.

I think there is always places you know, to lead on price. I think you know, certainly every country you are in is probably, you know, your top 5 or 10 corridors that you're going to find very competitive and certainly, you know, whether it is leading on pricing or being right there at the edge is you know, certainly important. At the end of the day, you know, consumers like anybody else consumers are interested in you know, in saving money, but consumers are also in the back of the mind always focused on quality and particularly in this industry I always strongly believe that they focus on consistency, and so we try to be very consistent in our pricing.

We try not to be moving those things around and I think, you know, big pricing you know, gimmicks are difficult. Coupon and promotions these kinds of things drive some consumer usage, you know, get some people onboard, you have a new market you have a new partner trying to drive a different corridor. You know, those are great ideas. At the end of the day, it is about profitable initiatives that are sustainable over the long-term and that's how we’ve --

Pamela Patsley

A consistent message, I think we have a consistent message of value along with trust, reliability, security those sorts of things, and that's only growing with the customer. So --

Unidentified Analyst

Okay, thanks, and congrats on the achievement at Walmart.com I guess US outbound. Can you help us maybe I would conceptualize what the opportunity in terms of maybe transactions when you're doing your diligence on that opportunity. How does that compare with the US to US Walmart.com relationship?

Pamela Patsley

You are hard to hear but I think you asked how can we compare US outbound on a dotcom basis with US to US.

Unidentified Analyst

Particularly with Wal-Mart.

Pamela Patsley

Particularly with Wal-Mart. I mean, you know, it's one, they now -- Wal-Mart consumers can send to close to 200 countries around the world. So right there versus just US to US. I think it just is a continued extension of that value proposition to the consumer and you know, we launched this just, you know, in the last 48 hours and you know, like in the first 30 minutes we had customers. So I would say we are filling a need together.

Alexander Holmes

Yes, and certainly all the online business we've rolled out has been, you know, received very well by the public and I think the opportunity, you know, with Walmart.com outbound is tremendous.

Unidentified Analyst

Great, just one last one. In Spain, good to hear that there are certain things to do to mitigate the economic backdrop there. Can you help us maybe distinguish between you said you know, you saw positive transaction growth there. How much of that was just you know, (inaudible) and how much of that was you know, maybe some core organic growth there. Thanks

Pamela Patsley

I'm not sure -- did you say how much was based on what?

Alexander Holmes

Organic growth in Spain versus new ads.

Pamela Patsley

It's a mix. I mean, and I guess I would say when our sales team continues to just add new agent locations, I mean, that's organic growth because that's our job adding new agent locations, activating consumers, attracting consumers. So, you know, how much was productivity through existing versus new that is hard to parse. But it takes both and we are going to continue to focus on both.

Alexander Holmes

Thanks [Robin]. We’ve got time for one more call.

Operator

Okay, we’ll go to Mike Grondahl with Piper Jaffray.

Mike Grondahl – Piper Jaffray

Yes, thanks for taking my questions. Two, it's midyear Pamela and, you know, the world is probably growing a little bit slower than everybody thought but have you changed or modified any plans in terms of where you're targeting growth, and then just secondly the CDO or the bond losses and some of those losses, is there any update or how is that progressing if you will. Thank you.

Pamela Patsley

Okay, great. You know, again I think if you look at largest received countries, largest send countries you would have to say our efforts are focused there and all the resulting corridors, and I would add just for size that while the largest send countries you know, it's US, and Saudi and Russia, I group Europe together. They may not like that, but that is how I do it.

I group, you know, Western Europe collectively because you kind of, you know, you get to a lot of individually large markets but smaller significantly so than Russia or Saudi, and certainly than the US. So you know, we kind of target on the large received, the largest send but no it's a network effect and we want to know whether that customers walking into [CVS] or the UK Post or [Spur Bank] or Wal-Mart Online or you know, wherever that we have that opportunity to send to someone anywhere around the world and you know, we're also focused.

So, you know, having said that I just told you about some very small countries that we just, you know, are launching that are very important countries though for certain corridors for certain DMAs and you know, we just -- so that's a little bit of how it goes and then within the regions they prioritize their sales force, their marketing and efforts and so on.

To your second question Mike on the CDO side and this is, you know, a case where MoneyGram is the victim of what seems quite clear to everyone that there were you know, whatever fraud, okay, in the way certain securities were packaged and sold. So we are pursuing recoupment of our losses. We don't have subpoena power, we’re not, you know, the government able to go after everything.

So we’ve kind of said based on public records and data and where we know we can go after recoupment we are pursuing that. So they are all on a slightly different track, the things that you are aware of. We have arbitration with Goldman Sachs set I think for early 2013. We have been -- the court cases, you know, they just have the timeline, procedurally are going through.

So you know, we’re willing to listen if anyone wants to settle prior to that but you know, if not we’ll continue to carrying through, and of course you know, we did receive funds. There was help from the government in the form of the SEC where they went after certain firms for securities packaged and sold, and we had the benefit of that in the last June quarter.

So that was about $32 million last year. There is one other security that we are an owner of that is part of the case that is held up between the judge and SEC deciding if what they came to with Citi as a conclusion with the right number or not, it's not a large security for us. So it's not going to be a huge recoupment however that ends up, but nonetheless it's kind of every dollar is a good dollar to get in on that.

Mike Grondahl – Piper Jaffray

Great, thanks for the update.

Pamela Patsley

Yes, thank you. I think that is it. I think we’re out of time. Okay.

Alexander Holmes

I thank everyone for joining the call and we look forward to speaking to you throughout the quarter.

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