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MoneyGram International, Inc. (NASDAQ:MGI)

Q3 2012 Earnings Call

November 09, 2012, 09:00 am ET

Executives

Eric Dutcher - Director, IR

Pam Patsley - Chairman & CEO

Alex Holmes - EVP & CFO

Analysts

Julio Quinteros - Goldman Sachs

Georgios Mihalos - Credit Suisse

Bob Napoli - William Blair

David Chu - Bank of America/Merrill Lynch

Kartik Mehta - Northcoast Research

Tim Willi - Wells Fargo

Mike Grondahl - Piper Jaffray

Brett Horn - Morningstar

David Togut - Evercore Partners

Operator

Good morning and welcome to the MoneyGram International Third 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, Mr. Eric Dutcher, Vice President of Investor Relations. Please go ahead, sir.

Eric Dutcher

Thank you, Brandy. Good morning everyone and welcome to our third 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. Also issued this morning were an additional 8K and press release regarding legal matters.

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 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 everyone on this call to read our SEC filings, including our 10-K for the year ended December 31, 2011, and our 10-Q for the quarter ended September 30th filed today.

Additionally, please 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 a full reconciliation of these non-GAAP financial measures to the related GAAP financial measures.

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

Pam Patsley

Thanks Eric. Good morning everyone. There are a lot of great things to talk about this quarter related to our business results, not the least of which is our sixth consecutive quarter of money transfer constant currency revenue growth that was punctuated by our four-year high of 18% transaction growth in sends that originated outside the US. But before I get into these details, I would first like to address our legacy matter concerning the investigation before the US Attorney’s Office for the Middle District of Pennsylvania and the US Department of Justice.

As you have hopefully seen by now this morning we filed an 8K and a press release disclosing that we've reached this settlement with the MDPA and the US DOJ in connection with the investigation of transactions and certain of the company's agents as well as this fraud complaint data and consumer anti-fraud program for the period from as early as 2003 to early 2009. In connection with this settlement the company has entered into a five year deferred prosecution agreement known as the DPA. Under the terms of this DPA, no further action will be taken against MoneyGram by the MDPA or DOJ on these matters if we meet the conditions set forth in this agreement. There is an option for termination early based on successful remediation action.

The company has agreed to the appointment of an Independent Compliance Monitor and to pay the US Government $100 million, which will be available to victims of the consumer fraud scam perpetrated through certain agents. Since this is now resolved, we have increased our accrual related to this matter by $70 million, adding to our $30 million accrual that we made in the second quarter. Further terms of the agreement are described in the 8K we filed this morning.

In connection with the agreement, the company is continuing to cooperate with the US Government and we will be making additional enhancement to our compliance program. I’ve said this before, but bearish repeating, we take compliance extremely seriously at MoneyGram and nothing angers us more than when people attempt to use our service to engage in illegal activity.

The standards of the MoneyGram of today, would not have allowed the types of activities described in the DPA to occur. Since 2009, we have created a new culture at the company and we've taken numerous steps to enhance our global compliance in anti-fraud program. These actions include the addition of new management and significant investments and enhancements to staffing, to our processes and technology all geared toward preventing consumer fraud and ensuring we meet the highest levels of regulatory compliance.

During that time, we have invested more than $84 million in our compliance program. We remain fully committed to conducting our business with integrity and we remain vigilant in our efforts to partner with law enforcement and regulators to thwart illegal activity. I expect much work in the days to come to ensure that we have covered every aspect of the agreement and the requirements for complying with it. From our ongoing interaction with the FTC, we know what it takes to comply with directives from the government; I have every confidence that the MoneyGram team will not only meet the requirements of the government, but will surpass their expectations.

Now with that said, let’s turn back to our great operating performance in the quarter. Consumers continue to recognize MoneyGram’s compelling products and valuable services as evidenced by our money transfer constant currency growth of 11% on the strength of 13% transaction growth. We also made good progress on the turnaround of our bill payment business which generated strong adjusted margins and cash flow.

In the quarter, we were delighted to complete key agent renewal, one with Wal-Mart and one with Advance America and certainly others around the world. The Wal-Mart agreement was completed on financial terms that are substantially similar to our current agreement and the new three year contract begins April 1, 2013. Advance America was signed for five years.

Our large agent network and robust compliance engine enable us to offer valuable products and services to the growing consumer base whose needs are not fulfilled by traditional financial institutions. In the quarter, we signed a new relationship with PayPal that will allow millions of their customers to get cash in and out of their PayPal account and also provide under banks consumers with a convenient way to participate in e-commerce, something previously not readily available to this segment of the population. Our pilot with PayPal is expected to begin in the first half of next year.

We also entered into an agreement with Gemalto that integrates MoneyGram’s Money Transfer platform with Gemalto’s LinqUs Mobile payment solution. This partnership will enable money transfers to be sent and received internationally through mobile phone and into mobile wallet. We have strengthened our global brand and our targeted international expansion has contributed to this. In key countries over the past three years, our brand awareness has grown substantially. In fact, in multiple countries we have more than doubled our brand awareness. Additionally, in many markets around the world, our brand recognition is equal to that of our largest competitor.

Over the last five years, we have more than doubled our agent locations. Our growth is focused on key regions such as the Indian subcontinent, China and Russia as well as strategic investments in their corresponding corridor payouts. In the quarter, we built new foundations in key markets such as with CIMB in Malaysia, and a new retail distribution network in Russia. New agent signings activations increased our locations to 293,000 worldwide; that represents 15% growth over the prior year. As a result, our business has become more diversified and resilient to regional political changes, economic conditions and competitive moves.

Now let me take you through our money transfers results and the trends impacting the three key quarter categories; US to US, our US outbound business and sends originating outside the US. First US to US; these sends represented 32% of money transfer transactions and 27% of revenue in the quarter. Transaction growth of 9% was lower than our historical growth level; US to US revenue growth was 8%, also lower than recent quarters, but actually still good in the light that it was very tight to transaction growth. Discounting led by our competitors especially in the online channel accounted for the 1% differential between transaction growth and revenue growth.

US consumer spending continues to be dampened by the weak economy. GDP growth is anemic for the second consecutive quarter which impacts the industry as a whole. Regionally, states and areas with the lowest unemployment have the strongest growth.

We are seeing a trend of consumers moving within the US for work leaving their families at home thus creating additional need for our services. US outbound transfers represented 34% of total transactions and 28% of revenue. Both transaction and revenue growth were strong at 13% and 15% respectively.

US to Mexico maintained its fast pace with 19% year-over-year transaction growth. Our revenue growth was particularly impressive given the competitive environment. During the quarter, we reassigned Coppel, the second largest department store chain in Mexico. This is one of the many important relationships in our extensive 13,000 agent distribution networks in Mexico. Despite the Mexican market shrinking by 6% in September as tracked by Banco de México, we grew our market share in the important US to Mexican market and now exceed 9% in this very significant quarter.

US to Latin America was excellent as well. Honduras, Guatemala and El Salvador all were strong. In Honduras, we added Banco de Occidente an agent previously providing a competitors service at 130 locations.

In Guatemala, we signed Banco G&T Continental with a total of 1,000 points of presence in the country. This was also a takeaway of a competitor’s key agent with whom they had previously had a 20-year relationship. Fueled by our targeted marketing campaign Moneygrado, we had good transaction performance in US to Philippines.

Finally, our agent growth in Africa continues to help the overall business expand. We are pleased with the US outbound growth in the quarter and we are positioned well to capitalize on this foundation for future growth. Transaction growth for sends originated outside the US reached a four year high at 18%.

Revenue growth was lower than transaction growth primarily due to the negative impact of the lower Euro against the US dollar. Strong results in France and Germany as well as the newer networks like Saudi Arabia, Russia and Japan continued to lead the way and offset weakness in the Italy and Spain.

Now let's review some of the regional trends. Beginning in Asia Pacific, our focus over the past few years of growing our network has paid off. Sends from the US, Italy and Africa to China have been solid despite lower face value of the amount sent. This quarter, we added 130 locations with Guangfa Bank which has locations in China, Hong Kong and Macau.

In some of the most important quarters, our growth has been fourfold. Our growth in Japan has maintained a phenomenal pace. Additionally to fuel future growth, we added two new agents in the country and renewed our largest agents. Even with all of this, we are just scratching the surface in this important G8 country.

In Malaysia, we signed CIMB, as I mentioned which secures a strong foothold in this top 10 send markets. Malaysia is a key send partner to India, Philippines, Indonesia and certain African countries.

In India, we continue to implement new agents, adding banks in more than 600 retail locations. During the quarter, MoneyGram sponsored the ICC T20 World Cup for Cricket and that was held in Sri Lanka. Significant marketing activities surrounding the events where for you cricket fans on the phone, the West Indies beat Sri Lanka in the final.

Russia, Ukraine and Romania drove transaction in revenue growth in the Eastern European region. In Russia, we signed a new agreement with Payment Center that propels MoneyGram into the Russian retail sector. As many of you are aware, there has been a focus in the industry on having a presence in this Russian retail sector and I am here to tell you today that we're very excited about this relationship and now uniquely positioned in Russia. Through this partnership, we will open up to 10,000 MoneyGram agent locations over the next two years.

We also launched new service in Bosnia with Nova Bank through 40 agent locations. The Romanian market has been an interesting case study in signifying the value of our diverse network. As economies declined in Spain and Italy, we saw growth in sends to Romania from the UK and Germany.

In the more recent quarter, we also saw increases in intra-Romania transactions and counter flow sends originating from Romania. While these trends have not driven the business globally, it is an interesting regional trend that demonstrates the value of our network and importantly the resilience of our consumers.

In Western Europe, we continue to have especially good results in France and Germany. France, the Francophone Africa send has been some of the strongest in the company’s network. We're pleased to see a little bit of strengthening in the Italian market.

In Spain, revenue and transaction growth has been good. However, the persistent high unemployment is challenging our customer. In late August, the ruling party move to drop public healthcare coverage for about a 150,000 migrants. Faced with reduced benefits, immigrants often enforce to move for work again. So we anticipate seeing another solid shift as migrants adapt to yet another political change.

In the Middle East, we also had impressive results. Saudi Arabia continues to be the growth engine that drives the regional sends. During the quarter, we added 1,800 new kiosk locations in the country with our partner [NCV]. Our Moneygrado campaign propelled excellent spend to Philippines from Saudi.

I am excited to announce that we began providing service in our 197th, country Qatar during this quarter and that was through Qtel’s mobile money platform. This also highlights our innovation in service offerings.

Now, let’s quickly take a look at bill payments business. As we indicated, we are pleased with the turnaround that our bill payment team is driving. Excluding the prior divestiture, transactions grew 5% with revenue slightly lower than last year.

On a reported basis, bill payment transaction volume decreased 4% and fee and other revenue decreased 7%. During the quarter, we added another 700 billers to the network. We have now completely turns the corner to consistent revenue growth, but we now have several consecutive quarters of transaction growth. If we look specifically at bill payment through MoneyGram Online, our growth has been robust and I am very excited about our prospects for this business.

Speaking of MoneyGram Online, our self-service and new channel revenue grew 40% over the prior year and represented 5% of total money transfer revenue. Our revenue growth was strong despite discounting pushed by our competitors in the online space.

In response, we lowered the prices to a few key quarters from MoneyGram Online to retain our momentum in the online consumer acquisitions. As a result, our transaction growth accelerated to 39% but our revenue growth was 19%. We closely monitor the competitive dynamics in this online space and we will focus on ways to minimize the impact of competitive discounting on both transactions and revenue growth in this channel.

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

Alex Holmes

Thanks Pam. Good morning everyone. Revenue in the quarter was strong, total revenue increased 5% to $338.6 million driven by the strength of our core money transfer business. Revenue was negatively impacted by $8 million as a result of the lower euro valuation against the US dollar as compared to the prior year.

Money transfer constant currency revenue growth was 11%. Investment revenue was $2.9 million down $1 million in the prior year on an average investible balance of $3.1 billion. I remain encouraged by the relative stability around investible balances and we are still yielding modest revenue in this lower interest rate environment.

We also performed well in the bottom line. Our adjusted EBITDA of $70.4 million was up sequentially while our adjusted EBITDA margin of 20.8% was flat. On a year-over-year basis, adjusted EBITDA was down due to the negative impact of a lower euro to US dollar exchange rate and a shift in marketing spend.

As you may recall last quarter, we mentioned that we would spread our marketing differentially in the back half of the year. I’ll provide some more details on our marketing expense in just a minute.

During the quarter, total reported operating expenses increased 30% over the prior year as a result of increased commissions expense, legal accruals and fees, and restructuring, reorganization costs. Total commissions expense was $152 million or 45% of revenue compared to 43.8% in the prior year. As a reminder, commission expense as a percentage of revenue at a consolidated level will continue to increase as money transfer becomes a greater portion of our overall business.

In the quarter, money transfer as a percentage of total revenue increased to 86% from 84% in last year’s third quarter. Money transfer commission expense as a percentage of revenue was up slightly year-over-year due to changes in corridor and received agent mix. Compensation and benefits decreased $5.9 million on a reported basis, while transaction and operations support increased $78.2 million. Excluding the impact of the legal accruals and fees of $72 million, transaction and op support was higher largely related to increased costs for transactional outsourcing and compliance support, along with increased marketing expense.

Marketing as a percentage of total revenue was 4.7% in the quarter. As Pam mentioned historically marketing spend in the third quarter has trended lower as a percentage of revenue, but this year in the third quarter we shifted several million dollars in expense from the fourth quarter to support our global rebranding efforts and campaigns for Moneygrado, ICC Cricket, and Ramadan.

For the full year, we still anticipate total marketing expense as a percentage of total revenue to be about 4.5%. Booked income taxes in the quarter were $9.6 million and cash taxes were about $100,000. Depreciation and amortization in the quarter was favorable at about $600,000 compared to the prior year. We continue to make good progress on our restructuring and reorganization activities. During the quarter, we rolled out several new point-of-sale and back office systems for our European operations. Restructuring and reorganization costs in the quarter were $3.9 million comprised of $2.3 million of transaction and operations support, $1.2 million of severance, and about $400,000 of occupancy equipment and supplies costs.

As a reminder, there's a slide in our quarter summary on the website which brings out our restructuring and reorganization costs into these categories. While we remain largely on track to wrap up our restructuring activities in 2012 to ensure optimal continuity of operations, we do anticipate a few activities extending into early 2013 with a cost of around $1 million. In the quarter, diluted loss per share was $0.77 on diluted shares of $71.5 million. This included a negative $1 per share impact due to the legal accrual and expenses and negative $0.03 per share impact from restructuring and reorganization costs and a negative $0.02 per share impact from stock based compensation.

In the quarter, free cash flow was $24.6 million or about 7.3% of revenue. Last year free cash flow was $36.4 million or 11.3% of revenue. Free cash flow was down from the prior year quarter due to higher signing bonuses for just strategic agent renewals and the timing of capital expenditures offset by lower interest payment. For the nine months ended September 30, free cash flow was $91.5 million up 8% from the prior year, driven by strong money transfer results and lower interest payments.

Capital expenditure in the quarter were $12.9 million related to investments in products and systems development, as well as compliance system and other regulatory oversight processes. Signing bonus payments in the quarter were about $16 million, signing bonuses tend to be lumpy, and as we indicated last quarter the third quarter would be on the high end as we closed several key strategic agent renewals and made some competitive takeaways.

Signing bonus payments are essentially a prepayment of future commission payments and are usually subject to call back provisions if agents do not reach expected volume levels.

Turning to the balance sheet, we again saw the positive results of our 2011 refinancing efforts with interest expense favorable in the quarter by $4.5 million on a year-over-year basis. We ended the third quarter with assets and excess of payment service obligation at $266 million, down slightly from the second quarter of this year, as a result of increased capital expenditures, signing bonuses and a [payment] settlement.

In addition, our [AEPSO] balance was impacted by a third quarter cash outflow, related to the timing of the settlement of a four-year old contract that crossed over with the second quarter. From a liquidity perspective, we generated a lot of cash and our liquidity position is solid. We have made an assessment of our current liquidity position, and while we do not mean to suggest that the company’s cash position will not be impacted by the legal settlement payment, we have enough cash to make the two payments for the terms of the agreement and still maintain adequate liquidity for our operating needs.

As a reminder, while we do not intend to utilize our revolver at this time, we do have access to a $150 million credit line should we need to access it in the future for operating needs.

As you know, we've been keeping a sharp eye toward the right timing of refinancing the remaining $325 million of our 13.25% second lien Goldman Sachs note. And despite recent developments, the debt markets remain favorable, and we still fully intend to refinance the notes and capture savings for our shareholders. The first call date without a full make-whole premium, is March 25 of 2013. Given the size of the full make-whole premium rather than incurring cost by refinancing before, we're focusing more on taping the term loan or high yield market sometime around the first call date.

As a reminder, we currently have arbitration and litigation outstanding to regroup losses from our past CDO and RMBS investments, and to the extent that we are successful in these endeavors, we could have upside to our cash position.

Turning now to the segments, total revenue for the global funds transfer segment increased 6% led by strong money transfer constant currency revenue growth of 11%. The segment reported operating income of $39.3 million and an operating margin of 12.4% down from 13.1% in the third quarter of last year. On an adjusted basis, operating margin decreased to 14.2% in the quarter down from 16.4% in the prior year as a result of increased marketing spend and a lower euro valuation to the US dollar.

Total revenue in the financial paper product segment during the quarter declined 10% to $20.3 million, with operating income of $7.6 million. Reported operating margin was 37.3% or 39.7% on an adjusted basis. Segment margin benefited from a lower rate of decline in investible balances and cost reduction efforts within the business. Financial paper products revenue represented 6% of total revenue in the quarter as compared to 7% last year.

And with that I will turn it back to Pam.

Pam Patsley

Thanks Alex. Again I am very pleased with the great operating performance of our company in the third quarter. Year-to-date money transfer growth has been strong, but our business does face headwinds and it has all year actually like continued weakness in Southern Europe, a strengthening dollar against the euro and increased competitive pricing.

Given these headwinds and additional investments we are making in the business, we are guiding to the lower end of our previously provided ranges. That said, one of the benefits of releasing a week later is that our October money transfer results are in. So while one month certainly does not make the quarter, I am happy to share that we are off to a great start in the fourth quarter.

As we look ahead to 2013, we are reviewing our business requirements and the external factors that impact us again including economic, regulatory and competitive changes. We look forward to providing you an outlook for 2013, on our next earnings call. In closing, we operate in a large and growing $500 billion industry and we have consistently out paid the industry growth to gain market share through a well defined strategy. We have a positive brands message, one that resonates very well with our consumers.

Our service fulfills a vital need for our customers and we place them at the heart of all we do. We have a focused growth strategy that maximizes our resources, and we are delivering smart innovation to the industry. This strategy has proven successful over the past several years as we responded nimbly to change and to challenges. We have every reason to believe, it will help us be successful in the future.

Before we turn to Q&A, I would like to make one final point. We are building a stronger and better MoneyGram everyday, our dedicated and talented team works tirelessly to ensure that we are the preferred provider for our services, and I want to thank each and everyone for their contribution to our joint success.

Thank you for your time and always for your interest today, and with that operator why don't you open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will go first to Julio Quinteros with Goldman Sachs.

Julio Quinteros - Goldman Sachs

A couple of quick ones, so is there anyway to think about the impact of the terminated agents and any of the incremental expenses associated with being compliant with the announcement this morning on the settlement here?

Pam Patsley

The way to estimate the expense of that?

Julio Quinteros - Goldman Sachs

Yeah, both the expenses and the revenue impact of the terminated agents?

Pam Patsley

Okay, so again, I really, really want to remind everyone of this. This investigation was for transactions and looking into agent activity that began as early as 2003 and all the agents that were the subject of this were turned off by early 2009. So now, we have a very robust compliance program. We have since 2009 an increasing amount each year invested about $84 million in our broad compliance and consumer anti-fraud program. So we have in our normal capital planning money allocated to continue to invest in 2013. I think the definition of those projects vis-à-vis this settlement will take on a little different clarity and perhaps prioritization may change a little bit, but I don't expect a huge delta to what we’ve typically been spending each year on compliance in terms of investment and capital spend. We will likely be continuing to add and perhaps a little bit at an accelerated pace to detain just we want to hit the ground running with this new directive and settlement.

Julio Quinteros - Goldman Sachs

Secondly, you mentioned pricing dynamics both in the online channel, I want to sort of dig in there and just going to get a sense for how extensive the online channel pricing dynamics really are? And then I thought I heard you to talk about 10,000 agents in Russia, can you just give a little bit more detail on the efforts around Russia itself?

Pam Patsley

Sure. Let me talk a little bit about Russia and then I'll turn to really the easy one there on the online pricing to Alex. So Russia, the retail sector is very, very important to us and as I said, we are uniquely positioned now with this partnership that we entered into in Russia, it’s just rolling out. We do not have anywhere near 10,000 activated; we've just begun that roll out. But it means that MoneyGram is now going to be available through this retail partner and our brand will have presence at ultimately 10,000 locations and not just through banks, so our business here to for in Russia Julio has been with banks. So this is very significant when we consider operating hours, days of service, street corner availability other things like that. So we are excited about it.

Julio Quinteros - Goldman Sachs

Got it.

Alex Holmes

Yeah, I guess the answer to the question on the online spacing obviously, it’s an area that we've had tremendous amount of success in the last couple of years. We entered the UK, we do some partnerships with some agents and pricing in the online space historically for us has been priced a little bit of a premium to the walk-in business as a convenient factor to it and it’s been a very successful endeavor for us and something that we look forward to continue to expand I think.

There has been some increased competition as of late and I think one of the things we've seen is certain amount of competitors dropping prices, offering zero fee kind of services, looking to try to move people perhaps more account based type transactions. But I think, we’ve for the most part been able to hold prices, I think in a couple of quarters particularly in the US to US market, a little bit US to Philippines, US to Mexico, US to India, we had to make some adjustments in areas where prices have changed dramatically. I would say in some cases, those prices now look more like the walk-in prices. So I think from a total price perspective, perhaps it’s more consistent with walk-in pricing, but certainly there is a lot of loss revenue when you have to make those changes and we made those changes for make sure we remain competitive in those markets.

I think broadly speaking pricing has been very good for us. As we talk about in the first half of the year, we really haven't seen a lot of heavy discounting in fact, we are undertaking a fairly large pricing initiative within the organization and looking at markets where we have opportunity to adjust prices favorably as well and make sure we're maintaining competitive rates with market dynamics and so that’s been good for us and I think go forward we're certainly interested to see what competition’s going to do and how it's going to play out as we go into 2013, but we feel pretty good about it right now.

Julio Quinteros - Goldman Sachs

Alex, one last one; as you think about the sensitivity to commission expense, as money transfer continues to grow, you made a specific call out there that it would become a bigger component of the business. So how should we think about the sensitivity of that?

Alex Holmes

It will become a larger percentage as it relates to total revenue, but really shouldn’t impact the overall numbers. I think to the extent that increases the percentage of money transfer revenue, I think would reflect either changing corridor or mix or changing agent mix, and I think we’ll just have those play out, that’s where we are really focus more I think is on how our commission rates are aligned not only competitively, but also how they relate back to our percentage of revenues making sure we hold margin and as I think I referred to, we have a few corridors where we brought on some new agents in receive markets and that’s put a little bit of pressure on that commission line, but nothing that I am really loosing any sleep over. There is really virtually no commission in FPP right now and so that’s just kind of been flat, so as money transfer gets bigger it just continues to move up.

Operator

And we will go next to Tien-Tsin Huang with JPMorgan.

Unidentified Analyst

Hi this is [Puneet] fitting in for Tien-Tsin she is on plane right now. So just to clarify if revision in revenue guidance for this year stems from unfavorable FX rates relative to earlier in the year or did you experience incremental deterioration in that; I am just asking because constant currency revenue growth stays at the top end of your 79% range on YTD basis?

Alex Holmes

I think Puneet, we and I appreciate you taking the call and being online this morning. The revenue I would say on a constant currency basis is more or less in line with where we want it to be; we are probably a little bit behind obviously from a planned perspective where we would want to be from a competitive perspective I think we feel really good about our results. We didn’t really give constant currency revenue guidance versus non-constant currency, there is a lot of variation in there and so it’s blending itself through and so the number that’s out there is affected by FX and certainly the euro pressure. No, there is nothing really change since any of the previous conservations we had with you in that perspective, I think that you can calculate the euro decline from last year to this year.

Unidentified Analyst

Following up a question on pricing; what do you expect for pricing for this year and maybe for next year?

Alex Holmes

I think this year it’s going to be consistent with what it’s been probably in the 1% to 2% range provided there is nothing towards end of the year for the holiday season; I think right now we feel really good about it. Next year, we are taking a hard look at it, obviously Western Union made some pretty statements on their call a week and a half ago and we’re keeping an eye on the market. I think what we want to do, we have some ideas of what we want to do, we feel good about it, we’ll give the 2013 outlook when we can.

Operator

And we will go next to Georgios Mihalos with Credit Suisse.

Georgios Mihalos - Credit Suisse

Just wanted to go back to the settlement; can you give us a sense as to how many agents have been terminated and maybe how many you are sort of planning to terminate over the near future? And maybe some color on the independent compliance monitor, exactly what that would be?

Pam Patsley

Okay, to the latter part of your question, we will be recommending or suggesting, naming three choices to the government and they will pull out from that, if they don't like of our three, and then we go back we offer more; so that's a little bit of that process. And clearly someone that has an understanding of the breadth and scope of our business will be very important to us, both us and the government, so I think on that we all agree and perhaps it’s just going to be a process that will kick-off and its possible one could be selected by year end but that could also just based on timing kick over in little bit into early 2013 actually.

Two, the part again about agents, so I want to separate this settlement is not per se identifying or requiring any closure of current agents. It pertains again to activities and transactions with agents from 2003 into early 2009. Those agents that were subject or part of this investigation have not been an agent for MoneyGram since early 2009, some even earlier than that. We are terminated earlier than that.

We have separate and apart from this settlement on that look back to that period of time which was a very similar issue that the FTC looked at we settled with them in the fall of ’09. Separate and apart from that, we have a very robust global compliance and agent monitoring system. We turn agents off all the time based on different criteria, we have more stringent criteria to accept agents and activate agents today than we did in the past and that continues to just work fine. You can use technology to enhance the awareness of that. So that's just a rolling ongoing each and every day activity and just part of what we do and its just the compliance team makes their decisions, the compliance team goes about their task and their responsibilities and decide to send, terminate, reeducate, retrain whatever it takes.

Georgios Mihalos - Credit Suisse

And just a quick follow-up, can you give us a sense how much of a tailwind to your business non-exclusivity has been in a lot of key corridors and maybe what the outlook is for additional quarter was both send and receive to go non-exclusive? Thank you.

Pam Patsley

As we talked about before clearly the non-exclusivity, I think being the smaller global player, we've had more benefits than harm by a little bit that this trend of going non-exclusive and that has ranged from just some agents in parts of the world particularly on the receive side, I think we've always talked about it, it really began with a handful of countries in Central Africa, some Francophone, Anglophone African countries then added MoneyGram. So that was a great initiative and more of a pickup for us.

There have also been that trend in non-exclusivity has also ranged from a handful of countries. Fortunately, generally, they have all been relatively small where maybe they had regulatory requirements that all the agents be banks and such as Bosnia and we actually had no agents. And so we were kind of locked out. So we've challenged that. It took a long time and we've now as I mentioned, bought our first agents in Bosnia. So that was another way this has opened up.

Clearly, we had great results in Mexico, with the addition of Elektra, as a MoneyGram pay out agent in Mexico. And we are really comfortable with the trends in this non-exclusive environment and we're beginning to see it come up but not as aggressively on the send side.

Operator

And we will go back next to Bob Napoli with William Blair.

Bob Napoli - William Blair

Question on, I guess, and the main thing I guess, with this settlement, Pam, we've been watching Western Union had a settlement out there for years and the news gradually gets worse with their monitor and as part of your agreement, its [Part D] companies undertaking to continue to enhance compliance beyond enhancements already made. I guess, how do we know or how confident are you that there isn’t going to be a material effect on your growth trends, your transaction growth, based upon having this monitor and having to make continued enhancements. Why doesn’t this turnout like Western Union has so far?

Pam Patsley

Well, I think the nature of the issue that we get to monitor, if I use that word correctly, it was very different and we didn’t get the details I am not going to speak for Western Union, but they are related to southwest border, the complexities of them integrating their three platforms to have a build out of aggregation and that’s just not, it’s very different from what we are working on, what we are looking at and what we have been addressing since 2009 some very specific reporting requirements that came with the FTC order in late 2009, that we adopted with vigor and very well and continue to work with the FTC.

So I feel this is really an extension and a refinement and additional requirements, I guess, you know, I am (inaudible) no more and optimist by nature but I also look at it and say through this, there will be no question we have the best compliance program and so it’s about continuing to have the vigilance that we have in proving it on agent monitoring, on consumer anti-fraud, we have been very aggressive and I think taken the lead for the industry in consumer education. I think this really starts from some levels at that place well. I have to compliment our frontline call center people who have continue to come up the curve and it is their intuition, it’s our training to our agents, it’s the frontline people and our agents that we are so appreciative of that has to identify and be on the alert for what doesn’t seem to be right. And I know we are getting it right because I now get a lot more complaints that we didn’t lack a transaction go through that someone just can’t understand why we are a money transfer company and you refuse transfer my money, but we are going to have some whatever you call that, fault negatives or fault positives or something like that but that is okay. It’s a little hard.

Bob Napoli - William Blair

Yes, what you are saying is, I mean you are confident that you know that the additional enhancements do you have to make beyond what you already made or not going to have the material effect on the growth of our business?

Pam Patsley

When we read what they are looking for; what our reporting requirements are, some of the governance changes that you saw on the 8-K was having a compliance on Ethics Committee. I can't promise with certainty but we feel very comfortable that we can execute our business model; we can continue to prosecute our business strategy and be the best. So that’s what we are setting [up] to do and we are setting up. I think we are approaching this with the same competitive spirit that we approach in growing our business. We will get it right. We are not going to fail.

Bob Napoli - William Blair

Thank you. Follow-up on [Vigo], Mexico and so Western Union, I am not sure if they have closed or they are closing 7,000 Vigo locations. Has that happened yet and what do you expect, do you expect the benefit from further obviously, I mean you are growing 19%, they are shrinking 20% in Mexico, and (inaudible) already in the numbers or is there another step up from the closing of the Vigo locations?

Pam Patsley

I think that’s more a question for them.

Bob Napoli - William Blair

No, have you benefited yet get from the closing of Vigo and I am not sure if they are closed yet?

Pam Patsley

We know what we are setting out to do on our Mexico business and developing it. It’s the strength of our agent networks there, and it’s the attention that our send agents all across the US. I'm really proud of the fact that our US to Mexico business and that growth is really fairly broad based. It’s not concentrated in a few key metropolitan areas. It’s not concentrated in a certain geography. It’s broad based and a lot of compliments goes to our marketing and our retail team here and those folks that work with all our national retailers and large agents because we are very focused on it. So its broad based; it’s across the US; and so I can just speak to what our intent is and that's to continue to gain share.

Bob Napoli - William Blair

You said October was strong, was it a transaction growth in line with the third quarter or slightly better or slightly worse, or you maybe just put a little color on October.

Pam Patsley

I shouldn't have said anything Bob, you know I can't say that. We were really pleased with October.

Operator

And we will go next to David Chu with Bank of America/Merrill Lynch.

David Chu - Bank of America/Merrill Lynch

So did you have discussions with the MDPA on why the settlement was so much higher than the FTC fine?

Pam Patsley

You know they are completely different government agencies, and I can just tell you this was the number that the government deems appropriate to settle this matter. We consider we are bored along with all the advisors that we had considered all options and we determined this with the best path forward for all stakeholders, and for me its look forward and ensure we continue on the good path that we've been on.

David Chu - Bank of America/Merrill Lynch

Just in terms of ticket size, can you just discuss how your principle per transactions have been trending.

Pam Patsley

It’s again whatever we talk about, 16,000 quarters, I'm not sure we've got the time. But it would be fair to assume that like-for-like long term quarters that we've had for long time in this global economy they haven't been growing significantly.

David Chu - Bank of America/Merrill Lynch

Have you seen them like-for-like down significantly.

Pam Patsley

Not kind of in this last year-over-year, no.

David Chu - Bank of America/Merrill Lynch

Okay.

Pam Patsley

Now each new quarter behaves differently, right. Culturally people send more, people send less, more often smaller amount, less often larger amount and so its, I've got one of everything, I think for you.

Operator

And we will go next to Kartik Mehta with Northcoast Research.

Kartik Mehta - Northcoast Research

You talked a little about pricing and you said obviously Western Union has said they are going at lower prices and you are looking at your overall pricing model. But what do you think the impact would be if Western Union goes out there and lowers its prices and becomes closer in price to you. Do you have the ability to lower prices to continue to keep the difference that you've had and try to keep getting transactions?

Pam Patsley

Well, we think it’s not just about price. We think the growing the strength of our brand is very important, but I will also say we are here to play for the long term.

Alex Holmes

Yeah, I think our value proposition to the market is something we've been very proud for the past numerous years, and I think it's been a relative position to the market. The largest competitor wants to bring their prices down. We certainly have to be sensitive to that. I think we've come a tremendously long way in brand outreach and locations around the world; recognition from consumers in various markets; the number of markets we reaching etcetera, etcetera.

So, I think that continues to build some competitive opportunity for us. So just them bringing their prices down doesn’t mean that we need to move our prices. If they do things where they drop below our price, if we start losing share in corridors, then you have to really take that under consideration. Certainly, the size of the efforts that they are talking about is something that raises your question a little bit and wants me to go look and find out exactly what they are going to do and where. But we have our own strategy that we continue to follow. We make adjustments as needed and as I said, sometimes we raise prices and sometimes we adjust them slightly to maintain competition in various markets, and I think that serves us well and we feel good about that we know what we're doing.

Kartik Mehta - Northcoast Research

Second question on upfront fees for agents. Alex you said that you had an opportunity to get some agents, both from a competitive standpoint and new agents and that’s why the payout feature’s a little high. Is the market changing or are you seeing an opportunity to get more agents; so you could see, for the next year or two, your payout fees increase because you have a chance to get some market share, at least from a agent standpoint?

Alex Holmes

Pam can add to this as well. But I don’t see a lot of difference competitively speaking from signing bonuses. We call it lump, you could call it seasonally effective or cyclically affected, I suppose. There is often a slug of supremely large agents out there who demand a premium for their service and those you always have to be competitive with and again it’s not every agent, it’s not consistent and it’s not in all market. So I don’t really feel that it’s changed much in the past several years I think it’s been fairly consistent.

Operator

And we will go next to Tim Willi with Wells Fargo.

Tim Willi - Wells Fargo

I just had a question around your earlier comments around brand recognition and market share. Is there any what we could think about or could you talk a bit about may be the average life of your customers. Do you feel like you are holding them longer in those markets where you’ve been very focused on the brand and the mind share. Typically have there been a lot of churn, where you felt like people constantly shopped, but now were sort of staying with MoneyGram longer than you would have thought. Just any kind of color you might be able to offer up there?

Pam Patsley

Tim there is a lot to that question and I wish Juan Agualimpia and some of his friends here to help me with this. I don’t know that we have a rich history here of a lot of scientific data to do compare to different points in time. So this is initiatives that this team has really undertaken and gives a significant and a key component to our marketing strategy and growth from here forward and for the last few years we’ve done a lot of [U&A] testing and other things.

Our loyalty program, I think would be one place where we see a lot of that, and we know in our loyalty program that there is tremendous longevity, not dissimilar from other great consumer brands and their loyalty program, but.

Alex Holmes

I think to your point if Juan was here he’d probably remind as that in those U&A testing, I think as we go by market our brand recognition consistently improves, and in some cases as we said as it’s more than doubled and others its on the rise and I certainly think that’s a testament to all the work that our team has done around the world and promoting our brand and adding agents.

Operator

And we will go next to Mike Grondahl with Piper Jaffray.

Mike Grondahl - Piper Jaffray

The first one is just in light of Octobers results being strong; can you point to the one or two things fundamentally that point you to the lower end of guidance for the year?

Alex Holmes

Number one I would probably just point to our year-to-date numbers. We are very pleased with the performance we’ve had particularly in the Money Transfers space. I think bill pay and FTT have done a little bit better, but broadly speaking the softness in Europe, the euro and some competitive pricing dynamics have kept those a little bit below achieving what we wanted to otherwise get to it. If you look at our year-to-date performance to get to high end of the ranges, I am not saying it’s impossible, but we certainly would to have to have a very strong fourth quarter, and given economic uncertainty and fluctuations in different markets, I think we are more comfortable point to the lower end of the range right now.

Mike Grondahl - Piper Jaffray

And then you mentioned the CDO lawsuits kind of I think for the first time in your prepared remarks. Any update on the timing there or anything we should be watching?

Pam Patsley

I'm sorry; I think we all missed it, what loss? Did you say lawsuits?

Mike Grondahl - Piper Jaffray

Yeah, the CDO lawsuits.

Pam Patsley

Yeah, Alex mentioned those when he was talking about liquidity that there is just possible upside. Certainly nothing we are counting on, nothing that's in the plan but it’s out there and anything we get is a goodie and we could begin to predict timing. So one of them is an arbitration and the others are litigation.

Operator

And we will go next to Brett Horn with Morningstar.

Brett Horn - Morningstar

Yes, I wonder it’s on the independent monitor as you mentioned kind of the issues that rose to the independent monitors are different for you and Western Union but I just wanted to confirm is the monitor constraint to deal with issues related to the matters that brought about the settlement or they are authorized to look at everything?

Pam Patsley

It is independent compliance monitor. So our global compliance AML program, consumer anti-fraud, all things that are embodied in that group.

Brett Horn - Morningstar

And I know Western Union kind of pointed out the main issue being that they have faced operationally as a result is there need to move agents to real-time data collection, I guess could you give some color there in terms of how you are already on real-time, would that be a shift for you if you had to go to that?

Pam Patsley

We have and particularly are doing a compare and contrast to Western Union and their southwest border issues which is where they derived or ended up with a monitor is that we've already built the case management tools, build out of our aggregation and I would say historically for Mexico we always had a lower dollar [ID] threshold than Western Union. So those are some differences.

Eric Dutcher

Thank you, Brett. Operator I think we have got time for one more question.

Operator

And we will take our final question from David Togut with Evercore Partners.

David Togut - Evercore Partners

Pam, could you give us a sense if you look at your top 10 quarters by volume, whether you are pricing at a premium, at parity or discounts to Western Union currently?

Pam Patsley

No, it’s not premium. And I would say it’s bound to be mostly discount and there's probably some uncertain [band]. So its not just a quarter, we've got quarter and then you have different bands. So I know it’s not premium, in some bands we might be more at parity and others we might be more at discount.

David Togut - Evercore Partners

So to understand the pricing dynamic for the industry going forward, if Western Union does lower price by mid-single digit, would you have any alternative but to lower in the mid-single digits or more?

Pam Patsley

What you said flat?

David Togut - Evercore Partners

If Western Union lowest prices by mid-single digit, which is what they said, they intend to do. So let’s just pick the number and say 5%. Will you have any alternative to reducing price by at least that amount to maintain discount for Western Union?

Alex Holmes

Certainly, I think as I indicated earlier, we're very happy with our market perception and where we're positioned in the market. There are lot of areas that they could probably drop prices 5% and we wouldn't have to do anything, certainly if there are areas where they come down to our level or go below if they are highly competitive. Of course you also have to look at other competition and any market you are in as you know, there is a lot of other niche competitors out there, there is mid-size regional guys in various markets and so a lot of it depends on how they are priced as well.

So I don’t want to sit here and say, if they go down five, we have to go down five, because we don’t know where they are going to make those changes and to what end they are doing that. I don’t if they are permanent, they are promotional, if they are in certain markets. When you look at various bands as Pam said, some of them were at par, a lot of them were at a discount, and there is flex in our pricing. So, I don’t also to want to say that no, we're not going to do anything but locations and network specific countries and city specific, we will certainly keep an eye on it.

David Togut - Evercore Partners

Just a last piece of that question, really relates to brand. Alex both you and Pam highlighted the strengthening of your brand, how do you think about marketing spending over the next 12 months as part of this equation to maintain or increase market share in connection with price, so you intend to dial up marketing spending next year as competition steps up?

Pam Patsley

We made the big step function adjustments in our overall marketing spend in 2011, where we didn’t have the people and programs and a process in place that we were comfortable raising it and we got back to kind of historical and competitive levels in around that 4.5% range of marketing spend of revenue. As Alex highlighted for you, that’s certainly going to be and we have a mindset of being much more flexible how we spend that across the quarter. So unfortunately it may drive some of you crazy on the lumpiness and that evenness of it, but we are going to spend it when we think we get the most banks for the buck and see the opportunity. So that level, I don’t anticipate changing for 2013 and that’s where we are staying for 2012 and it’s really about spending it appropriately and giving the most bank for your buck. We like our position also just one more statement a little bit back to pricing is, we like the niche we’ve carved out as the value player and that is not synonymous with the irrational pricing. I think operator that’s it.

Operator

Thank you. This does conclude today’s conference. We thank you for your participation.

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