MoneyGram International, Inc. Q2 2009 Earnings Call Transcript

| About: MoneyGram International, (MGI)
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MoneyGram International, Inc. (NYSE:MGI) Q2 2009 Earnings Call August 6, 2009 5:00 PM ET


Alex Holmes - Senior Vice President, Investor Relations and Strategy

Pamela Patsley – Executive Chairman

Jeffrey Woods - Chief Financial Officer

Anthony Ryan – President and Chief Executive Officer


Adam Tuckman – GoldenTree Asset Management

Robert Dodd - Morgan Keegan & Company


Good day and welcome to the MoneyGram International second quarter 2009 earnings conference call. (Operator Instructions)

It's now my pleasure to turn the call over to your host, Alex Holmes. Please go ahead, sir.

Alex Holmes

Thank you. Good afternoon, everyone.

My name is Alex Holmes. I'm the new Senior Vice President of Investor Relations and Strategy here at MoneyGram. I'd like to welcome you all to our second quarter 2009 earnings call. I've had the chance to speak with many of you already, some of you from the past, and I look forward to meeting more of you as we go forward.

With me today are Pam Patsley, our Executive Chairman, Tony Ryan, President and Chief Executive Officer, and Jeff Woods, our new Executive Vice President and Chief Financial Officer, who started with us on Monday.

If you've not yet seen our earnings release you can find it on our website at

I must remind you that today's call is being recorded and that the various remarks we make about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private 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 June 30, 2009, which is expected to be filed with the SEC on Monday, August 10th.

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

At the end of the call we'll have time for your questions. Please remember you'll need a password to ask a question on this call. Many of you should have received this password from the MoneyGram Investor Relations e-mail line.

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

Pamela Patsley

Great. Thanks, Alex. Good afternoon, everyone.

Before I get into the details of the quarter, I again would just like to introduce Jeff Woods. He's sitting here with us today alongside Tony and Alex, and we are thrilled that Jeff has joined the MoneyGram team.

Jeff is a very experienced senior executive with a strong financial services background and extensive experience in not only what I call the realm of the CFO but also in strategic planning, in technology and operations. So, welcome, Jeff.

Jeffrey Woods

Thank you, Pam. Thanks for those kind words.

Let me just say that I'm excited to be part of the MoneyGram team and I look forward to meeting many of you in the coming weeks.

Pamela Patsley

Great. So we are eager to get Jeff involved but, again, it is his fourth day, so we're going to give him a break and Tony and I are going to take you through the quarter. So with that, we'll begin.

Well, it's clear that the June quarter presented some challenges. And it's also clear that MoneyGram captured some sizeable opportunities and despite the loss in the quarter we did make some progress toward positioning the company for long-term growth.

We expanded our global agent network by 15% over the prior year, introduced our successful MoneyGram Rewards program in key markets outside of the U.S., increased our money transfer and bill payment transaction volume, and ended the quarter with unrestricted assets of $386.9 million at June 30, 2009.

I'm also pleased to announce that today we authorized an additional payment of $30 million on our revolver. Thus, with the $70 million payment we made in May, we will have paid $100 million on our debt in the past four months. This represents a 10% decrease in our total outstanding debt since May 7, 2009.

Now for the second quarter we reported a net loss of $3.3 million and revenue of $291 million. Results for the quarter were negatively impacted primarily by two significant items - a legal accrual for $12 million and a $9 million provision for loss related to the termination of an agent.

The $12 million legal accrual relates to the potential resolution of ongoing discussions with the staff of the Federal Trade Commission. These discussions pertain to customer complaints that third parties have inappropriately used MoneyGram's money transfer services in conjunction with consumer fraud activity. And while there can be no assurance that we will reach an agreement with the staff of the FTC or that this matter will not result in future litigation, MoneyGram continues to implement additional systems and processes to continue to further safeguard consumers against fraud.

Now let me give you a little more color on the situation with the terminated agent. This was our only agent in the particular country, and the agent became delinquent on payments due to MoneyGram. We negotiated in good faith to keep the network open and collect our receivable, but after working through several alternatives we realized that the agent had no intention of paying us and we made the difficult decision to sever the relationship. We believe that this situation is unique and it's not reflective of credit issues in our broader network or the economic environment. We are pursuing legal action against the agent but, as it states in our press release, we are fully reserved.

Turning to our core business, as anticipated, both money transfer revenue and transaction volume growth continued to slow globally as consumers remained challenged by the global economic environment, especially in markets such as the U.S., Mexico and Spain, where migrant employment is highly dependent upon the construction and manufacturing industries. In the United States, disposable personal income - DPI - decreased in June $143.8 billion or 1.3%. The ISM Non-Manufacturing Index continued to contract and the unemployment across the U.S. continued to rise.

Against that backdrop, during the quarter money transfer transaction volume excluding bill payment increased 4% and revenue decreased 1%. On a euro-adjusted basis, revenue increased 3%. Total money transfer transaction volume including bill payment increased 1% and revenue decreased 2%. Adjusted, again, for the impact of the euro, money transfer revenue including bill payment increased 1%.

The difference between volume and revenue growth is primarily related to a decline in the euro rate and lower average principal per transaction as our consumers continue to adjust to a challenging global economic environment.

Spain in particular continues to have a sizeable impact on our results. It is our largest send market outside of the United States based on transaction volume. In the quarter, international transactions increased 2%. Excluding Spain, international transactions increased 11%. As we discussed in the first quarter, we expect the impact of Spain on our reported growth rate to lower as we enter the fourth quarter. Our international transactions accounted for 22% of our volume in the quarter.

During the quarter, transactions to Mexico declined 9%, in line with the industry as currently measured by Banco de Mexico, which also reported a 9% decrease in transactions for the quarter.

Money transfer transactions originating in the U.S. and Canada, excluding bill payment, increased 8%. Total money transfer transactions in the U.S. and Canada including bill payment grew 2%.

Our bill payment business and our consumers continue to be impacted by the slowdown in the U.S. economy. Transactions were down 8% in the quarter as the traditional bill payment industry such as auto, mortgage and credit card lending were clearly impacted by a challenging economic environment. The termination of a top biller in mid-Q3 2008 is also making the year-over-year comparisons more challenging. With that said, however, we continue to show nice growth in our prepaid vertical and are also pleased with the rollout of NetSpend and Visa ReadyLink.

During the quarter we also completed the restructuring of our biller sales and account management functions as well as the product management organization to better align the team for new growth opportunities.

In spite of the current economic situation, we continue to execute our strategy and demonstrate meaningful progress in positioning MoneyGram for accelerated long-term growth. We remain focused on aggressively managing our balance sheet, becoming more efficient and executing against our strategies to deliver the best value to our agents and consumers.

During the quarter we continued to strengthen our distribution by maximizing existing relationships within our premiere global agent network and we're pleased with the rollout of a number of important customers in North America. We're excited to be a part of Wal-Mart's continued expansion of its dedicated money centers, which provide tremendous visibility for our products. Additionally, we continue to see excellent month-on-month growth through our CVS network.

Our continued expansion with Canada Post reflects the success of our relationship and the growth it is delivering for both companies. In June we completed the successful rollout of an additional 2,000 Canada Post locations, bringing our total to 3,000 locations. We also recently announced that we will bring MoneyGram's money transfer service to several thousand more Canada Post outlets over the next year, significantly expanding MoneyGram's agent network from coast to coast. Given the breadth and depth of Canada Post's network, access to our money transfer service will be within 1.5 miles of nearly 90% of the urban population of Canada.

We also completed a number of significant agent renewals in the quarter.

In the U.S. we resigned two important chains - Wegmans and WilcoHess - to multi-year contracts.

In Ecuador we resigned to important agents - Banco Pacifico and Banco Austro - representing nearly 200 high-volume locations in this important receive country.

In Africa we resigned the Cooperative Bank in Kenya and Thomas Cook Mauritius to multi-year agreements.

In Spain we renewed our contracts with super-agent Caja Navarra and its important sub-agent, Carrefour. Through this relationship we will bring added convenience to consumers by now providing our money transfer service at the cashier line. The agreement also will expand our services into 120 new Carrefour Express supermarkets in addition to the 140 hypermarkets where our services are currently available.

And finally, in the important Asia-Pacific region, we renewed our agreement with National Credit and Commerce Bank in Bangladesh and LotusFX, which has locations across Australia, New Zealand, and Fiji.

During the quarter we also made significant progress in adding new relationships around the world. In Mexico, FarmaPronto, a pharmacy chain offering extended and weekend hours, is our newest agent and adds nearly 800 locations to our network. Including the additions in Mexico, we added more than 1,300 locations in Latin America, reaching the 25,000 agent location milestone in this very important region.

According to the World Bank, Latin America received nearly $64 billion in remittances in 2008. Across all of Latin America we are well positioned to accelerate our growth and we believe there are large opportunities for us, particularly in Brazil and in Argentina. We're also focused on reenergizing our Spain to Latin America corridor.

In high potential emerging markets we also had good success, adding several significant agents across the Middle East and Asia-Pacific regions. In Saudi Arabia we launched National Commercial Bank, the largest bank in the Middle East, and began offering money transfer services through telephone, the Internet and the bank's 1,400 ATM locations, creating one of the largest money transfer networks in Saudi Arabia. This is a vigorous launch, which included television advertising, signage and multiple press conferences, and I mush say so far the results have been excellent.

Saudi Arabia is the second-largest send market in the world behind the United States, with more than $17 billion in remittances in '06 and a population that is 27% foreign born. Our alliance with a premiere financial institution like National Commercial Bank represents a significant opportunity for our aggressive growth plans in the Middle East and builds on important expansions we've made this year in India, the Philippines and Bangladesh. All three countries are top 10 receive markets and are highly important corridors for Saudi Arabia.

Year-over-year we grew our presence in India over 50% and we expanded our network in Bangladesh with the addition of Al-Arafah Islami Bank and TMSS.

In Thailand we launched CIMB Thai Bank and we signed Advanced Bank of Asia in Cambodia.

In South Korea we recently signed Shinan Bank and that will provide MoneyGram service in all 928 of its locations, more than doubling our network in South Korea and bringing our valued money transfer service to the growing immigrant population, again in another very important market.

Another key aspect of expanding our distribution is to control or to own our network in certain selected markets due to regulatory or competitive or other factors. In France and Germany we now have 67 company owned stores and they continue to provide solid growth. The store-owned model has opened many opportunities for us and the results of the expansion have been tremendous. We're extremely pleased with our progress in these markets and we anticipate many more good things to come.

During 2009 we are focused on increasing productivity in existing locations and are continuing to selectively add stores near immigrant populations. This is a complementary strategy to our efforts with the EU payment services directive. On that front we're focused on the November implementation of the European Union payment services directive and we continue to make progress on this important initiative.

In June we submitted our license application to the United Kingdom Financial Services Authority, the regulator responsible for payment institutions there. We expect to obtain a license in the U.K. which we can then passport to the other 30 or so countries in Europe that comprise the EU and the EEA.

We believe the directive presents significant opportunities to expand our network by opening new classes of trade that will build on our existing base of licensed agents and company owned stores. We have prioritized the largest market opportunity, are actively engaged in the selling process, and are recruiting additional sales reps dedicated to bringing on new agents.

For the quarter, our global agent network remained at 180,000 locations. Now, that's up a healthy 15% year-over-year, but it is flat with the first quarter. The primary reason we're flat sequentially is the loss of U.S. Bank as well as the decision by the U.K. Post and [Post Atelian] to shut down remote and inefficient locations. It's important to note that the closures will have little impact on our volume and we will continue to add productive locations to ensure we have a network that's better prepared to address the ever-changing needs of our consumers.

So, year-over-year, we more than doubled our locations in Eastern Europe, we increased our network in Asia-Pacific by 25% and grew our agent base by 30% in Africa. Across the globe we're focused on increasing productivity in existing locations and building out key corridors through the expansion of our worldwide network.

Now I'd like to turn the call over to Tony.

Anthony Ryan

Thanks, Pam.

Pam has discussed our progress on our first growth strategy, how we've expanded distribution in the quarter, and now I'd like to walk you through our remaining three growth strategies and then I'll wrap up with a brief discussion of our financials.

Our second strategy for pursuing profitable global growth is to provide our consumers with a superior value. In the quarter we launched our international expansion of MoneyGram Rewards, our loyalty program offering members fee discounts, receive notices and fast and convenient form-free money transfers. We introduced the program in Germany in June and went live in France and Spain in mid-July. We plan to roll out MoneyGram Rewards in Italy and Canada later in the fall and in the U.K. next year. The MoneyGram Rewards program offers consumers a compelling reason to choose MoneyGram and our successful program in the U.S. gives us confidence as we extend MoneyGram rewards into countries that dominate the send side of the global remittance market.

The benefits of our program attract first-time MoneyGram customers and early results indicate that these new customers are staying with our brand longer and transacting more often. In June 76% of the customers enrolling in the program were new to MoneyGram. The total active MoneyGram Rewards membership at the end of the quarter grew 28% year-over-year and transaction volume for the same period was up 50%.

On the pricing front you will probably remember from last quarter that we launched a rollback pricing campaign in our Wal-Mart locations, promoting an $8 U.S. to anywhere international send for amounts up to $200. The promotion and marketing efforts of this rollback event have increased visibility of the MoneyGram brand across the U.S. More recently we began a second rollback promotion focusing on growing our already significant share of the U.S. to U.S. market with a send up to $100 for $11. Wal-Mart is supporting this promotion, which runs through September 29th, with a television campaign that again promotes the MoneyGram brand. So far we are very pleased with the results of both promotions as overall volume has increased more than forecast.

Multi-currency payout is another great example of providing our consumers with increased value. During the quarter we launched multi-currency payout in the important country of Romania, enabling customers who send money to Romania to better manage their financial needs by giving them a choice of euro, U.S. dollar or local currency at the time of the transaction. We now offer multi-currency across approximately 70% of the countries we serve.

Our third strategy for providing profitable global growth is to deliver a low-cost service platform to our agents and consumers. A great example of this is our agreement with NCB in Saudi Arabia in which we are providing money transfer service to Saudi consumers through ATMs, the telephone and online, making our service truly available 24 hours a day when they need it and where they need it. So far performance has exceeded our expectations and we are focused on growing in this very important send market.

Our MoneyGram online platform -formerly called eMoney Transfer - continues to provide us access to a new category of customers with deeper banking relationships. Online money transfer and bill payment transactions increased 17% over the second quarter of last year, with revenue up 31%. We are excited about our enhanced MoneyGram online service, which we plan to roll out later this year. The improved platform will significantly improve consumer usability and operating efficiency.

Our fourth strategy for achieving profitable global growth is to drive product innovation. During the quarter we expanded our successful prepaid business with the launch of Visa ReadyLink and NetSpend programs, enabling us to load these cards through our 40,000 MoneyGram Express payment agent locations across the United States. We also recently introduced a Visa-branded prepaid card in select MoneyGram agent locations. These important relationships expand our product offerings and broaden our presence in the key prepaid market.

Finally, we have signed an agreement with Affinity Global Services, a mobile gateway provider, to facilitate the connection of mobile network operators around the globe to the MoneyGram agent network. Our relationship with Affinity Global is an important first step in our mobile strategy and lays the foundation which we will build on in order to enable MoneyGram consumers anywhere in the world to send money to an account associated with a mobile device.

On the strategy front this has been a very exciting quarter for us and we are focused on executing our growth strategies and continue to make great progress.

Now I'd like to turn to the financials.

As you can see in our earnings tables, we have adjusted certain measures by excluding net securities gains and losses and severance-related costs as we believe these adjusted measures provide information that's useful to you in understanding the underlying operations of the company.

Adjusted EBITDA was $43 million in the second quarter and we had a net loss of $3.3 million. Both EBITDA and net loss were impacted by lower revenue growth in the two significant items Pam discussed earlier - a $12 million legal accrual for an FTC matter related to consumer fraud and an increase in the provision for loss of $9 million as a result of the closure of one of our agents.

Looking at the components of revenue during the quarter, fee and other revenue declined 1% to $278 million, largely as a result of a lower euro rate, a decline in principal per transaction and corridor mix. This was partially offset by a favorable money transfer volume.

Investment revenue declined 75% from $34.5 million in Q2 2008 to $8.5 million in Q2 2009. This decline was the result of lower yields earned on our realigned investment portfolio and a substantial decrease in our investment balances primarily as a result of the planned departure of the top 10 Official Check customers.

Adjusted investment commissions expense continued its trend from the first quarter and decreased $23.5 million or 98.5% due to lower Official Check commission rates from our repricing initiatives and lower investment balances in the second quarter.

On a segment basis, Global Funds Transfer reported adjusted revenue of $269 million versus $277 million in the comparable period last year. Results were impacted by a lower euro exchange rate and a decline in money transfer average principal per transaction, partially offset by an increase in money transfer transaction volume, including bill payment, which increased 1%. Adjusted operating income was $13.5 million and adjusted operating margin was 5%. The declines in both operating income and margin reflect the impact of the legal accrual and the provision for loss associated with the closing of one of our agents.

In the Payment Systems segment we continue to see the benefits from the restructuring of our Official Check business. As a result of our repricing activities in this segment, we continue to see profitable returns and improved margins. Second quarter adjusted operating income was $6.9 million, up from $336,000 in Q2 2008. Adjusted operating margin improved to 40.5%.

Now, moving on to the balance sheet, at June 30, 2009 our assets available to cover payment service obligations totaled $5.4 billion and payment service obligations totaled $5.1 billion. At the end of the quarter 99% of our portfolio was in cash and cash equivalents and government agency securities. Our unrestricted asset position was $386.9 million at the end of Q2.

To wrap up the financials, let me make a few comments about our expectations for 2009.

Going forward we expect money transfer volume to grow, but that rate will be slower than what we have experienced historically as a result of the global economic slowdown. Investment is expected to continue to decline on a year-over-year basis in both segments, with the change in our investment strategy, lower interest rates and declining balances.

We currently expect to continue to pay cash interest on the subordinated notes and accrue or pay in kind the dividends on our Series B preferred stock.

Now I'll turn it back to Pam for some final comments.

Pamela Patsley

Thank you, Tony.

Against the backdrop of a difficult economic environment, the second quarter was challenging for MoneyGram; however, again, there were some strong accomplishments in Q2. We expanded our distribution network into new markets and with new partners, we entered new adjacent markets, we rolled out new technologies to our existing customers, and with the payment we authorized today, we've paid down 10% of our outstanding debt.

MoneyGram operates in a nearly $400 billion market and we need to continue to take the necessarily steps to position this company to capitalize on opportunity. As a company, I believe we should be gaining market share faster, accelerating our top line growth, and expanding our margins. We are aggressively managing our balance sheet, investing in the business and continuing to pay down debt.

Achieving all that takes a lot of effort and I believe talent will be a differentiator for us. As you've seen, we continue to build the management team. Jeff Woods, new CFO, Alex Holmes, new SVP of Investor Relations and Strategy - two good examples sitting with us here today.

We've also added tremendous talent in our IT area, in the compliance areas and across our product functions. In the regions we're focused on building a world-class organization by adding strong talent in both the key send and key receive markets. We currently have active searches under way for a new general counsel and an EVP of human resources and hope to have these positions filled soon.

There is a tremendous amount of opportunity for MoneyGram. We continue to work closely with our agents and our partners, ensuring that we make the best decisions for the business and position MoneyGram for long-term profitable growth.

As always, thank you for your time today and thank you for your interest in MoneyGram. We will now open it up for questions.


Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Adam Tuckman – GoldenTree Asset Management.

Adam Tuckman – GoldenTree Asset Management

The operating income on the Global Funds Transfer segment of $13.4 million, I just want to confirm that's after the $12 million and $9 million accrual and provision has been taken out?

Anthony Ryan

Yes, that's correct.

Adam Tuckman - GoldenTree Asset Management

And given it's basically nonrecurring, if you were to add that back you basically had close to 13% EBIT margins. And what I'm trying to understand is, on a going forward basis is that the right range for this business? It was 14% in the first quarter, 13% in the second. Do you envision this staying in the low teens?

Anthony Ryan

Yes. We're not doing projections in terms of what the operating margins would be on a go forward basis, but I would confirm the numbers would be correct the way you're looking at it for second quarter.

Adam Tuckman - GoldenTree Asset Management

And then in terms of agent locations, the 15% year-over-year, is there a way to translate that into a sequential number?

Pamela Patsley

Sequential we were flat. In other words, March quarter '09 to June quarter '09, 180,000.

Adam Tuckman - GoldenTree Asset Management

So does that pick back up in the second half just in terms of growth on the agent side?

Pamela Patsley



(Operator Instructions) Your next question comes from Robert Dodd - Morgan Keegan & Company.

Robert Dodd - Morgan Keegan & Company

On the Payment Services customers first, it's a business we still care about some, the obligations on the balance sheet were pretty close, well, essentially flat sequentially. Are you been expecting customers to continue transitioning off? How far are we through the process? Is that number going to stay flattish or does it still have a material amount to decline to get all the customers who are going in-house?

Anthony Ryan

What we're going to see, I think, there is a slow decline. We have repriced most of the business at this point with an additional fee component and we're just about complete with that process now and we will see some runoff in balances. It will be a slow decline.

And I would keep in mind that those balances, too, have long-term components and some of those items are outstanding for quite a period of time. So we think that there will be attrition, but it will be a much more profitable as we reprice it.

Robert Dodd - Morgan Keegan & Company

About advertising, it sounds like you've been very aggressive with the launch in Saudi Arabia and given the success with the loyalty program launch, 76% of enrollees are new, have you changed anything in your approach to marketing either in Saudi Arabia or in Germany with these loyalty launches to really focus on new prospects or is it just you just pump in more money into advertising than you have in the past.

Pamela Patsley

Definitely not the latter. I'll let Tony take you through some of the details.

Anthony Ryan

I think there's many aspects to the marketing program. I'd start with what's different would be the MoneyGram Rewards program. That is a direct relationship with the consumer where we can interact with them and have that direct relationship. And the promotions that we have through that, we like that a lot. And it also rewards our recurring consumers and people that are transacting with us the most.

Secondly, I would say that we're very focused on putting up signs. That's just a basic awareness factor for marketing and getting those signs up around the globe as we continue to roll out the network is critically important. We're very focused on that.

We worked with Wal-Mart and in some cases our partners, agent partners, are working with us in terms of marketing programs and also helping with some of the spend in countries where we're doing things together.

So I think those are some of the things that we're working on right now.

Robert Dodd - Morgan Keegan & Company

Can you tell us what you expect CapEx to be? Do you have a targeted run rate as a percentage of revenues? What's your view on how you're going to budget that as well as just what the hard number you expect it to be is.

Anthony Ryan

We're not doing a projection on CapEx or any metric really for the full year, but I'll give you the second quarter. It was $8.8 million in Q2.


And at this time we have no further questions. I'd like to turn the call back to Tony Ryan for any closing comments.

Anthony Ryan

Well, thank you very much for being with us on the second quarter call and we look forward to talking to you on the third quarter call. Have a great day.


Once again, that does conclude our conference call for today. We thank you for your participation.

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