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Executives

David Parrin – Executive Vice President, Chief Financial Officer

Phillip Milne – President, Chief Executive Officer, Chairman of the Board

Analysts

Kartik Mehta – FTN Midwest Research Securities

Elizabeth [Grusome]

Bob [Snabley]

Robert Dodd – Morgan Keegan & Co.

Analyst for Craig Maurer – Calyon Securities (USA)

MoneyGram International, Inc. (MGI) Q1 2008 Earnings Call May 8, 2008 5:00 PM ET

Operator

Welcome to the first quarter 2008 MoneyGram International earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, David Parrin, Executive Vice President and Chief Financial Officer.

David Parrin

Good afternoon everybody and thanks for joining us on our first quarter 2008 conference call. With me on the call today is Phil Milne, our Chairman. If you have not yet seen our earnings release you can find it at www.MoneyGram.com.

I must remind you that the various remarks we make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provision 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 everybody to read our SEC filings including our 10-Q for the period ended March 31, 2008 which will be filed with the SEC on May 12, 2008.

I’ll now hand the call over to Phil to discuss the business results.

Phillip Milne

Thank you for joining us on our first quarter 2008 conference call. Let me start by giving you a brief update on the money transfer business and then Dave will touch on the re-capitalization, the portfolio, financials and the segment information.

Before I start I just want to thank our employees for their efforts and contributions during a challenging period. We were able to complete another strong quarter in the money transfer business, despite many distractions posed by the capital transaction and continue to execute at providing affordable, reliable, and convenient payment services to our consumers and business partners. Our first quarter results continue to demonstrate our growth opportunities in the money transfer business and our commitment to grow the business for the long term.

In the first quarter money transfer volumes including our express payment product increased 22% which is a solid performance by all measures and was driven by network expansion, pricing initiatives that provide a strong consumer value proposition and the support of target marketing efforts.

These results were a top a strong first quarter last year that saw money transfer transaction growth of 30% driven by our simplified pricing initiatives. Money transfer fee and other revenue including bill payment services grew 25%. This was as expected and reflects transaction growth, pricing stability, product mix and the benefit from the stronger Euro.

Same store sales transactions continue to be strong growing at 14%. Domestically originated money transfers including express payment grew at 22% driven by continued growth across all of our corridors. Transactions originating internationally or outside of North America grew 30% and transactions to Mexico grew 4% Q1 2008 over Q1 2007.

Just a reminder that Mexico is a relatively small portion of our total money transfer business and has accounted for about 8% of our total transactions for the first quarter. While economic conditions in the U.S. housing market and immigration concerns dampen the growth we continue to out-perform the market which according to Banco de Mexico contracted 1.8%.

Network growth continued to be robust as we increased our locations around the world by 33% year-over-year to approximately 152,000 locations. We now have 35,000 locations in North America, almost 23,000 in Latin America, nearly 48,000 locations in Western Europe and the Middle East, over 15,000 in Eastern Europe and in excess of 5,000 locations in Africa.

We are also pleased to report that we had several significant customer signings in the first quarter. Our largest customer and long-term partner, Wal-Mart, extended its agreement through 2013 as a part of our transaction with TH Lee and Goldman Sachs.

In February Ace Cash Express, another major customer signed a multi-year renewal and extension of its contract to offer money transfer, express payment and money order services. In March we announced the completion of the roll out of three new services; money transfer, money order and express bill payment services in over 2,800 Advance America locations across the United States.

We are continuing to focus on the expansion of the network, our global marketing efforts and the infrastructure investments to support growth.

I’ll now turn the call back over to Dave to discuss the re-capitalization and payment systems and other financial details of the quarter before we head into the Q&A.

David Parrin

As Phil discussed the first quarter results demonstrate the strength of our relationships with our customers and agents and the commitment of our employees. So to help you see the strong results of the first quarter I want to sort through some of the noise from the portfolio sales and the re-capitalization.

The press release provides quite a bit of detail on the portfolio sales and the recap and our first quarter 10-Q that will be filed on the 12 will have a good breakdown of significant items affecting this quarter and where they are classified on the income statement.

But let me start with the capital transaction. We completed the transaction on March 25 and received $1.5 billion of debt inequity. The re-capitalization allowed us to change the risk profile of the portfolio putting the problem behind us and to have the capital to continue to fund the money transfer business which is the growth engine of the company.

Our 2007 Form 10-K provides a detailed debt inequity capital contribution which will also be summarized in the 10-Q so I won’t reiterate that information. However, you’ll be able to see that we did accrue dividends on the $760 million of convertible preferred in the first quarter and that amounted to $1.8 million. The preferred dividends will be approximately $25 million each quarter for the balance of 2008.

Our new senior and junior credit facilities provide additional net funds of about $650 million. We currently have $100 million available under our revolver. Interest expense for the quarter of 2008 was higher than 2007 because of increased debt outstanding. We also recognized a $6.2 million loss on the interest rate swap that fixed the rate on our pre-transaction outstanding debt. Interest expense will average about $32 million each quarter for the additional debt we took on for the remainder of the year assuming we pay in kind on our second lien note.

We completed a plan during the first quarter to realign the investment portfolio away from asset backed securities and into highly liquid assets through the sale of a substantial portion of the portfolio. Consequently we sold securities at a fair value of about $3.2 billion and that is after the impairment charge of December 31 for proceeds of $2.9 billion and we realized a loss of about $256 million.

Proceeds from the sale were reinvested in cash and cash equivalents. Also during the quarter we recognized other losses of about $51 million that relate to losses and impairments on other types of securities that went through our other than temporary losses. The net realized loss and impairments totaled $307 million in the first quarter and that shows up as negative revenue in the income statement.

We recorded a loss of $57 million that is recorded as investment commissions expense because of swaps that were related to our official check commissions were no longer effective given the restructuring of that business.

Now for the segments, total fee and other revenue for the Global Funds Transfer segment increased $50 million or 25% in the first quarter of 2008 versus last year. Money order revenue declined as paper based transactions declined and with the lower rate on the float balance that resulted from the portfolio repositioning.

Included in total revenue of the first quarter 2008 are net security losses of $44 million. Today’s press release provides additional segment information so you can see the gross revenue, investment revenue and the net securities losses by segment and particularly within the GFT segment businesses.

GFT commissions’ expense in the first quarter of 2008 increased 23% compared to the same period last year primarily driven by higher money transfer transaction volume, tiered commission rates paid to certain agents and increases in the Euro exchange rate. We extended the current agreement with Wal-Mart as Phil mentioned which includes an increased commission rate for the term of the contract.

For the balance of 2008 you can expect the GFT segment to continue to be affected by lower investment revenue on money order float balances. We also expect slightly higher commissions on money transfer transactions in the second quarter which are expected to level out for the last half of the year.

Within the Payment Systems segment there are a number of items that make this quarter a little difficult to follow. First, investment revenue declined by 29% due to the lower investment balances as well as the lower yields on the repositioned portfolio. Commission expense increased 70% in the first quarter of 2008 compared to 2007 reflecting the $57 million loss on the interest rate swap I previously mentioned. We no longer expect to hedge forecasted commission payments.

At the end of April we informed our official check customers that we are pricing the business effective by the end of the second quarter and that re-pricing will lower commissions expense. At this point though it is difficult to forecast the impact of the re-pricing on our float balances. While our profit margin will be adversely affected by lower yields earned on float balances the re-pricing initiatives will mitigate the impact of those lower yields.

From the balance sheet perspective as of March 31 you can see that our unrestricted assets stood at a very robust $379 million. So the repositioning of the portfolio and the re-capitalization has substantially reduced our portfolio risk profile and provided the liquidity and capital necessary to operate and grow our business.

With that, Phil, I’ll give it back to you.

Phillip Milne

With that I’ll wrap up here and we’ll head to Q&A. I just want to say we continue to be extremely excited about the Global Money Transfer market and the tremendous opportunity it presents for us. We have a strong balance sheet, dedicated employees and enduring business relationships. Along with our new shareholders, TH Lee and Goldman Sachs we are well positioned for the future.

With that we will open up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Kartik Mehta – FTN Midwest Research Securities.

Kartik Mehta – FTN Midwest Research Securities

Dave I better wanted to understand the earnings power of the company. I know you said there is a lot of inputs and outputs here this quarter and that makes it a little bit difficult so I just wanted to see if you could maybe give where you think the earnings part of the company is. I know the margins have yet to be reset because of some of these new contracts. Maybe if you could talk about that a little bit?

David Parrin

I think one of the things that we really want to get focused on here is the money transfer business. I think as you look through the earnings release and the 10-Q that will get filed you will see when you take some of the noise out the tremendous accomplishment we have had in there and quite frankly I think that really is what this business is about.

We are not providing any guidance at this point just given the significant changes in our overall operation particularly on the payment systems side. Until we actually get this re-pricing through and see what the impact of that is on the balances I think it is really tough to provide any forecast on that.

I will tell you that clearly, and we talked about as part of this restructuring process, we really are focused on repositioning the portfolio reducing the types of assets in there and consequently the yield. So we really have shifted our focus over to managing that cost of funds if you will, the commission we pay to the banks. That is really where we see the spread coming from is by reducing that cost of funds. But we have to let some of this work its way through the system before we get a really strong handle on that.

Phillip Milne

I think we just continue to be so excited about the money transfer business and the results that we got in the first quarter and we continue to see robust growth in that business so we are going to put a tremendous amount of energy behind growing the MoneyGram franchise on a global basis.

Kartik Mehta – FTN Midwest Research Securities

Could you talk about what you think would happen to margins in the Global Funds Transfer business? I know you used to provide that data and I didn’t see it this time around. Maybe you could talk about what is happening to those margins as some of these large agents are re-pricing.

David Parrin

One thing I’ll say, as we mentioned in the comments, was that with our renegotiated contract with Wal-Mart the commission rate did go up and I think on a quarter-over-quarter basis you will see that go up. We really expect to see that even out over the last half of the year, settle out and then continue from there. But in terms of margins at this juncture I think we’re going to wait to get through another quarter here to let some of the dust settle on some of the changes we’ve been making. Yet we are still quite pleased with the results that we go. We got a tremendous amount of growth even through this rough period we went through.

Kartik Mehta – FTN Midwest Research Securities

Did the business at least stay double-digit EBIT margins even with the new contracts or are we talking the business maybe went to the single-digit EBIT margins?

David Parrin

The money transfer business?

Kartik Mehta – FTN Midwest Research Securities

Yes.

David Parrin

No. It is still going to be double-digit for sure. We got a tremendous opportunity going forward there and we’re really going to focus on growing that business and of course we have already talked about leverage in the past. So the impact of the WalMart transaction, as you well know our history has been very successful with them in terms of the growth of their business and so I just don’t see it going in a direction to those levels of margins.

Operator

The next question comes from Elizabeth [Grusome].

Elizabeth [Grusome]

This is actually [Aleel] filling in for Liz. First I would like to start with the Global Funds Transfer especially on the money transfer side. On the channel, Mexico and Domestic, what trends are you seeing there and also with your network? The expansion you are having in your network, how should we be thinking about the commission structure, the margins, besides WalMart? Because you are growing your network pretty fast.

Phillip Milne

We are having some terrific growth in the network. I think in Mexico we continue to see more of the same. Mexico has been soft for a number of quarters now but we continue to out-perform the market and we’re very pleased about that but I don’t think any of us anticipate a major up tick in Mexico until the U.S. housing market, specifically new construction, starts to pick up. I think we’ll see more of the same. Dave do you have anything to add to that?

What was your second question?

Elizabeth [Grusome]

The second question was on the payment systems side. After the second quarter if I heard you correctly after the second quarter the commissions will be lower so you will get back to normalized margins? Is that correct?

David Parrin

I think what I said was that with the re-pricing our commissions should decline. But keep in mind our yield will decline substantially as well. So until we can actually see the full impact of our re-pricing of the funds to the commission side of it, it is very difficult to predict at this point exactly where it is going. I don’t think we’re going to get back to historical margins by any stretch.

Elizabeth [Grusome]

How should we think about the investment deal? Where is it going to be around?

David Parrin

You’ll see in our financials that a vast majority of the portfolio is invested in very short-term government funds and the like. So, you can get a pretty good idea just by looking at the screen what the rates are on those assets.

Operator

The next question comes from the line of Bob [Snabley].

Bob [Snabley]

I’m trying to see if I have the share count right. The fully diluted share count. With the preferred picking, year end fourth quarter share count about 230 million shares and for 2009 about 246 million shares for the full year on fully diluted shares? I don’t know if that, if you look ballpark wise is that?

David Parrin

You know what the calculation is. Conversion price is $2.50 and if you assume we pick during that period of time you can calculate that as well. I don’t have that data in front of me though, Bob.

Bob [Snabley]

The intention though is probably to pick at least through that period of time?

David Parrin

I think that our focus, I don’t know about that period of time, it is a quarterly decision that we will be making. Clearly we’ll have to make a decision of our cash needs, our capital needs and what our position is relative to that in terms of whether we are going to pick or pay cash. I think for the foreseeable future our expectation is that we will probably pay in kind.

Bob [Snabley]

With the nice numbers out of the money transfer business going through the re-capitalization and obviously the challenges you have had over the last couple of quarters, have you lost any significant relationships and what has that done to the business? Obviously the numbers look good in the first quarter but is there anything that isn’t visible here?

Phillip Milne

I’d say there has been nothing material from an agent standpoint that happened. We lost a bank in Poland due to the merger of that bank with a large Western Union agent. Other than that I think we lost one small customer in the quarter. Actually you see the net increase we had in the network in the first quarter was extremely robust. So I think we came out of the noise of the first quarter in a great position and volumes were amazing. So, we feel very good about exiting the first quarter and the capital transaction and the momentum that we have.

Bob [Snabley]

Can you give me a little more color by geographic region on some of the growth rates if you could?

David Parrin

We don’t break all of them out. I gave in the comments some of the sizes of the various regions. Maybe something that might be interesting is that locations in India and China were up 38% and we just crested 10,000 locations in India. We are really putting together some meaningful numbers in that region and it is a very important region for us. These are obviously on small numbers but our volume to India and China is up 60% year-over-year so we are starting to make some real progress in those important markets.

Bob [Snabley]

What percentage of your revenue does not touch North America at this point?

David Parrin

We haven’t really tracked it in that way. We look at it certainly by origination but we’ll take a look at that in the future and probably have that available. It might actually be in the 10Q. I’ve got to remember all the details of it.

Operator

The next question comes from Robert Dodd – Morgan Keegan & Co.

Robert Dodd – Morgan Keegan & Co.

In the press release it notes $7.7 million of expenses related to the transaction, is that all in the compensation and benefit line or is it scattered amongst some other lines?

David Parrin

It is in the transaction operations line. It is really professional fees related to the deal and that was just the primary.

Robert Dodd – Morgan Keegan & Co.

I’ve noticed that you have now started advertising on TV. That is something that you historically haven’t had much exposure in that area because I think the return on investment maybe wasn’t targeted particularly well at the customer base you were aiming for. What has changed there and how aggressive are you going to be in your marketing and advertising programs going forward?

Phillip Milne

I think that the way to answer that question is I think at this point in the growth story of MoneyGram we felt it was appropriate with the size of the network we have and the momentum to get back on TV. It is also part of our new branding image we have rolled out as well which we think is going to resonate extremely well with our consumers and our customers. So I think you’ll see us be fairly aggressive over the next few quarters in the media.

Robert Dodd – Morgan Keegan & Co.

Lastly, on whether to pick or not to pick what is the thought process that is going to go through whether you should invest in cash flow rather than incur further dilution in the minorities or whether you should just accrete additional shares and additional dilution?

David Parrin

We’re moving into our first quarter of really having to make that decision. So we have not been through it fully. I think as you might imagine we are going to look at what our free cash flow is during the quarter and our cash position and our need for capital deployment. Based on that information we will make a decision whether or not we would pay in cash or in kind.

Operator

The next question comes from Analyst for Craig Maurer – Calyon Securities (USA).

Analyst for Craig Maurer – Calyon Securities (USA)

Just a little question regarding the expense side. I know you are not giving that much color but can you give some directionality as to where you think the expenses are going to go specifically on the operations support side and the comp and benefits side for 2008 at least?

David Parrin

We’re just not giving any guidance is the bottom line. I’m not sure if there is some underlying question there.

Analyst for Craig Maurer – Calyon Securities (USA)

More trended directionality is what I was concerned with. If we look back over the last couple of years is it fair to say it will follow the same pattern generally or is there any reason to think that it has changed significantly?

David Parrin

I think a couple of things, one is we have made a lot of progress in building the support and the number of positions we have needed to continue to grow. Now there is still a lot of demand for additional headcount if you will but we have been very focused on managing that headcount growth. I think that is a real focus.

On the payment systems side I think certainly that business is right sized and actually is going to be smaller. We are clearly looking at our costs beyond compensation throughout that business to determine where we may need to take some of those costs out. Again, there is going to be a little bit of noise as we go through and restructure some of these things. We are very focused on the expense side of the equation.

Analyst for Craig Maurer – Calyon Securities (USA)

Have you ever disclosed what the split is between employees whose dedicated at least percentage wise who is dedicated to payment systems versus GFP?

David Parrin

No.

Operator

There are no further questions at this time.

Phillip Milne

Thank you very much Jasmine and thanks once again for joining us this afternoon. We continue, as I said, to be very excited about the money transfer business, the momentum we maintained in that business through the first quarter and the opportunities ahead for us in the business. So thank you for joining us and we look forward to speaking with you next quarter.

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Source: MoneyGram International, Inc. Q1 2008 Earnings Call Transcript
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