MoneyGram International, Inc. (MGI)
Q2 2008 Earnings Call
August 7, 2008 5:00 pm ET

Executives
David Parrin – Executive Vice President, Chief Financial Officer
Anthony Ryan – Executive VP and Chief Operating Officer

Analysts
John Derusso (ph) – Robotti & Co

Presentation

Operator

Good day ladies and gentlemen and welcome to the second quarter of MoneyGram International earnings conference call. (Operator Instructions) My name is Nikita (ph) and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We’ll facilitate a question-and-answer session towards the end of today’s conference at which time you may press *1 to participate. If at any time during the call you need assistance key *0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to introduce your host for today’s call, Mr. David Parrin, Executive Vice President and Chief Financial Officer. Please proceed sir.

David Parrin

Thank you, Nikita. Thank you and welcome to everybody this afternoon and we are starting the first time with a slide presentation. So, we’ll have you following along with us and bear with us as we move from slide to slide. So, thanks for joining us again on our second quarter 2008 conference call. With me today is Tony Ryan our Executive Vice President and Chief Operating Officer. If you have not yet seen our earnings release, you can find it at our website www.moneygram.com. We’ve also posted a brief slide presentation regarding today’s results on our website and that’ll be available after the call. During the call as I said we’ll be discussing adjusted measures that do not conform to Generally Accepted Accounting Principles but we’ve reconciled those measures to GAAP measures in our earnings release and in the slide presentation. As you are likely to note that the second quarter of 2008 GAAP financial results are preliminary because we are finalizing the market valuation of embedded securities within our preferred stock agreements and any of the adjustments for the embedded ones that are not cash they will not affect the non-GAAP adjusted measures reflected in the tables that we’ll be discussing. I’ll provide more information on that later.

I must remind you from a forward-looking statements standpoint, 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 SEC filings that we make on a regular basis and I encourage everybody to read our SEC filings including our 10-Q for the period ended June 30, 2008 which is expected to be filed with the SEC on August the 11th.

I’ll now hand the call over to Tony to discuss our business results, Tony.

Anthony Ryan

Thanks Dave and thank you everyone for joining us on our second quarter 2008 conference call. I’ll start by giving you a brief update on our business and the significant strength we continue to see in money transfer. Dave will cover the financials including segment information and then I’ll wrap up with a summary of our strategic priorities. We’ll work up the presentation for this particular call so that you’ll get a clear view of our strong financial position and the tremendous growth opportunity we have ahead of us as a result of a clear and focused strategy. Before we begin, I want to first thank our employees for their efforts and contributions during the second quarter. Your commitment to our core values has been instrumental in navigating a challenging period allowing us to continue to deliver on our primary purpose to help people in businesses by providing affordable, reliable and convenient payment services.

Starting on slide 3, I want to start the business update by reminding everyone that the recapitalization was finalized on March 25th and through this transaction we’ve fully addressed our balance sheet issues. We’ve finished the second quarter with unrestricted assets of nearly $350 million and a highly conservative investment portfolio with negligible risk. The composition of our investment portfolio was nearly 90% cash and 9% agency securities as of June 30th. While there are still some lingering valuation items relating to the past investment portfolio issues impacting our financials, it is important to know that they were contemplated as part of the recapitalization and substantively they do not affect our strong balance sheet. Dave will provide more color on this during his comments. Now, core money transfer franchise delivered another robust quarter proving that we’ve not missed a beat. Our growth continues to be supported by rapid expansion of our global agent base, which grew 26% year-over-year. Our much smaller official check business was repositioned during the second quarter. We achieved modest profitability even before the full benefits of our re-pricing initiatives were realized. We experienced minimal customer turnover thus far as a result of the official check pricing action which now has an average pay out rate of fed funds plus 85 basis points. The new pricing changes had an effective date of June 1st or July 1st depending on the particular relationship. We also started the exit process of our 9 largest customers and expect to see those balances running off over the next 12 to 18 months.

The sum of all these actions is that we believe that we’re now in a position to generate profitability on the official check product with negligible portfolio risk. We had a strong financial performance in the second quarter. Money transfer and bill payment transactions increased by 19% year-over-year and money transfer and bill payment fee revenue by 23%. Importantly adjusted EBITDA was $58 million for the second quarter providing substantial cash flow for continued investment in our core money transfer and bill payment products and to pay interest on our debts. On a reported basis EBITDA was $40 million.

Next on slide 4, I’ll touch on a few highlights for the second quarter in our money transfer business which was part of our bigger segment, global funds transfer. Network growth continues to demonstrate strength across all regions as we increased allocations around the world by 26% from 125,000 in the second quarter of 2007 to 157,000 in the second quarter of 2008. We grew money transfer volume including bill payment by 19%. The solid performance was driven by network expansion, our strong consumer value proposition and targeted marketing efforts. Domestically originated money transfers including bill payment grew at 20% driven by continued growth across all of our quarters. Transactions originating internationally or outside North America grew 23% and now account for 22% of all of our volumes.

Our international operations continued to capitalize on the opportunities being created by worldwide integration trends. Transactions to Mexico grew 3% while economic conditions in the US housing markets and immigration concerns have dampened this particular quarter’s growth we continue to outperform the market which according to the market in Mexico statistics contracted 1.1% in the second quarter of 2008 compared to the second quarter of 2007. We are also pleased to report that we renewed several significant customers, added several new important agents and acquired two small companies which I’ll cover in detail later in the presentation.

We increased our revenue in core money transfer and bill payment by 23% from $207.9 million in the second quarter of 2007 to $254.7 million in the second quarter of 2008 and that’s our fee revenue. This was expected and reflects transaction growth, pricing stability, product mix and the benefit from a stronger Euro.

Now, I’ll turn it over to Dave to discuss our financials. Dave?

David Parrin

Thanks Tony and as Tony discussed the second quarter results demonstrate the strength of our relationship with our customers and agents and the commitment of our employees. I’ll take the next few minutes to get you a view of our results excluding the items that do not have a significant impact on our operations. As you’ll see from the slides and our interlinked tables we have adjusted certain measures by excluding net securities gains and losses, market value changes in our swaps and executive’s severance and related costs as we believe these adjusted measures provide you useful information in understanding the underlying operations of the company.