MoneyGram International, Inc.
Q3 2016 Earnings Call Transcript

Published: 30 Oct 2016

[Operator:]

Good morning and welcome to the MoneyGram International, Inc. Third Quarter 2016 Earnings Release. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Suzanne Rosenberg, Vice President of Investor Relations. Please go ahead, ma'am.

[Suzanne Rosenberg:]

Thank you. Good morning, everyone, and welcome to our third quarter 2016 earnings call. With me today are Alex Holmes, Chief Executive Officer, and Larry Angelilli, Chief Financial Officer. Our earnings release and informational slides are available on our Web-site at moneygram.com. Please note that today's call is being recorded and some of the information you will hear contains forward-looking statements. Actual results or trends could differ materially from our forecast or expectations. For more information, please refer to the risk factors assessed in our Form 10-K for 2015. MoneyGram assumes no obligation to update any forward-looking statements. Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. Non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules, and you will find reconciliation tables within our earnings release issued this morning and in the Form 8-K submitted to the SEC. And now, I will turn the call over to Alex.

[Alexander Holmes:]

Thank you, Suzanne, and good morning everyone. As we have discussed all year, our focus on improving profitability and our overall financial strength is central to our story for 2016. In the third quarter, that story continued as our results again showed solid improvements to key financial metrics. We saw operating margin expansion, growth in EBITDA and EPS, and importantly, strong adjusted free cash flow generation that enabled us to exceed our full-year expectations for cash flow in just nine months. These results are particularly impressive considering that our top line growth continues to be hampered by challenges in a few of our larger send markets. However, our core business is strong and the bottom line is that our overall quality of earnings continues to improve and is more than offsetting slower revenue growth. Having just returned from Money20/20, I'm more excited than ever about the transformation of the money transfer industry as technology continues to revolutionize the customer experience. It is clear that our leadership in bringing innovation to the market is bringing us closer to our customers. Our focus on new digital technologies, supported by a unique global cash network, is truly positioning MoneyGram as a financial technology leader. Recently, we launched MoneyGram MobilePass and MoneyGram Kameleon, which are exciting transformative products that differentiate our brand and attract new customer service by making it easier to send money. MoneyGram MobilePass is a new digital money transfer service designed to provide the ultimate customer experience by making transactions faster and more convenient. MoneyGram MobilePass eliminates forms and enables customers to stage a transaction on a mobile device or online and pay for the transaction at thousands of locations across the United States. We look forward to expanding MoneyGram MobilePass internationally in the coming months. MoneyGram Kameleon is a revolutionary turnkey product that offers a customized Web-site for businesses looking to offer a seamless money transfer and payment experience. Kameleon is built on moneygram.com's award-winning mobile and Web platform. We first launched this product with Walmart and we are now building on that momentum and expanding the availability of this private-label service to other retailers, financial service providers, and telcos looking for a dynamic online site to offer money transfers. These two innovative products exemplify MoneyGram's continued investment to transform the customer experience through timely and relevant digital innovations. We further expanded our digital footprint in the third quarter, adding direct-to-account services into 16 new countries. MoneyGram's direct-to-account service enables senders, whether in store or online, to direct their money transfer to a recipient account in more than 40 countries around the world. This service now reaches more than 2 billion bank accounts, including traditional bank accounts, mobile wallet accounts and other virtual accounts. This capability greatly enhances our customers' ability to spend money how they want and where they want. Direct-to-account helps receivers and senders improve their lives by increasing convenience and encouraging financial inclusion through savings. In fact, through MoneyGram's global direct-to-account network, we now have the ability to reach 66% of the world's banked adult population. Our award-winning moneygram.com Web-site, app and kiosk were created to make money transfers easier. Kiosks can now be used for MoneyGram transfers at more than 3,000 CVS/pharmacy locations in the United States, and at retailers and banks in Europe, across the Middle East and Australia. The kiosks are a stage-and-pay product designed to provide a faster and easier service for customers. We also reach customers through ATMs, which enable customers to either receive cash or upload funds. Combined, our product is now distributed in over 33,000 kiosks and ATMs in nine countries around the world, with more soon to follow. As we've discussed many times in the past year, online risk management is a critical factor in our ability to be successful in the digital world, and in 2016 we have made a lot of improvements in this area. Importantly, these efforts have helped us to reduce losses, improve customer throughput, and in total, improve the probability of our moneygram.com business. During the quarter, moneygram.com continued its growth, adding more than 225,000 new active customers. All of this activity continues to support the rapid expansion of our digital business. Growth in the quarter was slower than in prior periods, largely due to more difficult comparisons from the prior year. As you know, last year we relaunched moneygram.com and rolled out several major kiosk programs, all of which accelerated growth in the third quarter of last year. Digital growth was also muted by softness in Saudi Arabia, where a large portion of our business originates from kiosks. All of that said, I am extremely bullish on our digital business, and already in October, we have seen the transaction growth rate of our digital business rebound into the double digits and we look forward to continued growth as we round out the fourth quarter and beyond. Our non-U.S. sends business continues to perform well around the world despite continued headwinds in the Middle East and parts of Africa. In Saudi Arabia, where oil prices continue to impact the economy, our business was again affected in the third quarter by lower remittance volumes. While we did see some signs of stability, we continue to approach that market cautiously. In Libya, the unstable political environment and weak economy has put limitation on capital outflows, which continues to place a limitation on money transfer spends. Similarly, in Angola, which was a strong market for us last year, the country is essentially now closed to banks and remittance providers. As you know, we launched sends from Nigeria almost two years ago and it quickly became one of our largest send markets, with sends actually exceeding receives. However, new central bank capital controls in Nigeria were recently implemented, which restricts sends to 50% of received volume. This occurred at the same time that we were growing over rapid growth in Nigeria from last year. These regulations currently are inhibiting our business in this country and we expect this to continue into the fourth quarter. However, outside of these four markets, we are seeing continued strength across the business, especially in Europe, Asia and South America. Earlier this week, we announced the launch of Walmart2Walmart Mexico, powered by MoneyGram, an exciting first of its kind cross-border money transfer service. This product offers Walmart customers sending from any U.S. Walmart location to any Walmart Mexico location a $6.50 transfer fee when sending up to $800. Not only is U.S. to Mexico the largest corridor in the world with $24 billion sent per year, it is also Walmart's largest distribution of stores outside of the United States. We are extremely proud to have been selected by Walmart U.S. and Walmart Mexico to provide this important service for their customers. We collectively believe this is a huge opportunity to not only increase market share, but also expand the size of the market, which is a win-win for all parties. In conjunction with the Walmart2Walmart Mexico product, we also introduced new fees at Walmart for U.S.-to-U.S. transfers in bands over $900. While these fees will impact U.S.-to-U.S. revenue growth in the fourth quarter, revenue from these bands originated at Walmart currently represents about 1% of our total revenue. We continue to work side by side with Walmart each day to ensure our customers are receiving the financial services they depend on at an affordable price. Our relationship is strong and we are very excited about all of the innovative products, contract renewals and cross-border expansion that we have brought to the market in 2016. It is clear that MoneyGram is uniquely positioned to leverage our physical and digital assets to provide an omni-channel experience for all of our customers worldwide. The combination of our digital and physical capabilities makes our value proposition even more distinct, our relationships with our customers even more dynamic, and our future growth prospects even stronger. And with that, I'll turn the call over to Larry.

[Larry Angelilli:]

Thanks, Alex. MoneyGram continued to demonstrate improved financial performance in the third quarter, extending the trend of wider margins and increasing cash flow. We were able to achieve these improvements in spite of continuing challenges, including the volume reductions from the Middle East, very tough comps on our Nigerian business, and lower revenues from the U.S.-to-U.S. corridor. In the quarter, we increased operating income 58% year-over-year and 62% sequentially. EBITDA increased 17% year over year, and as we anticipated, adjusted EBITDA grew 8% constant currency over the strongest quarter of last year. In addition, compared to last year, MoneyGram increased its adjusted free cash flow $100 million over the first nine months. On a reported basis, there was a negative impact of 1% on revenue growth, primarily due to the stronger U.S. dollar versus pound sterling and the euro. We were able to offset some of the revenue impact of the stronger dollar through geographic diversification of our cost base. So far, the impact of Brexit on MoneyGram has been the translation impact of the weakening pound sterling. While send volumes continue to be solid, the weaker pound is affecting our total revenue on a reported basis. Aside from currency issues, the decisions to close certain unprofitable businesses that we discussed last quarter are still negatively impacting our revenue growth, but as you know, these actions continue to have a positive impact on our bottom line. Total revenue for the third quarter was $383 million. Money transfer revenue was $340 million, an increase of 4% on a reported basis and 5% on a constant currency basis. The U.S.-to-U.S. channel represented 12% of money transfer revenue. Total transactions remained stable from last quarter. Revenue was down 7%, primarily due to lower volume of transactions below $200. Our U.S. Outbound business delivered an 8% increase in revenue, while transactions increased 6%, led by sends to Latin America, parts of Asia and Africa. In total, for the third quarter, non-U.S. sends represented 50% of money transfer revenue and 42% of money transfer transactions. Non-U.S. revenue grew 4% on a reported basis and 6% on a constant currency basis, driven primarily by Europe, but offset by headwinds in Nigeria, Libya, Saudi Arabia, and Angola. For the quarter, our U.S. Outbound and non-U.S. sends business combined accounted for 88% of total money transfer revenue and grew 7% on a constant currency basis. We continue to be pleased with the performance of our digital assets, which for the quarter represented 13% of our total money transfer revenue and increased 12%. Third quarter adjusted EBITDA was $69 million, representing 5% growth on a reported basis and 8% growth on a constant currency basis. Adjusted EBITDA margin improved to 18%. Commissions as a percent of revenue for the third quarter improved also, 44.6%, compared to 45.8% last year. And as a reminder, commissions tend to vary throughout the year as our business is affected by mix and seasonality. Total non-commission operating expenses for the quarter decreased as a percent of total revenue, mainly due to our overall efforts to control expenses. This is partially offset by a $1.8 million increase in depreciation and amortization. We have been successful in refining our risk management techniques for our online products to the point that our margins in that business are approaching the margins in our cash business. MoneyGram's net income increased $5.3 million to $10.2 million and diluted EPS was $0.15 for the quarter. Adjusted diluted EPS was $0.25. Income tax expense for the quarter was $4.7 million, representing a 32% tax rate. That lower tax rate resulted primarily from certain tax credits realized in the quarter, and benefited earnings per share by $0.01. Adjusted free cash flow for the quarter was $31 million, a $14 million increase from last year. Agent signing bonuses were $3 million in the quarter versus $8 million last year. Capital expenditures were $22 million, a $7 million reduction from last year. And we ended the quarter with $173 million of cash and cash equivalents, a $25 million increase from June. The impact of all this on the Company's balance sheet and the return to profitability has a positive impact on our balance sheet. Leverage, which peaked last year at 3.95x, is now down to 3.45x. We also made an optional $10.5 million prepayment of debt this month, which will help to further improve our leverage ratio, but it's not reflected in the quarter-end balance sheet. In addition, our cash balances increased, and with the moderation of our CapEx and signing bonuses, we expect stronger cash flow to persist. CapEx as a percent of revenue peaked last year at over 7%, and it's now about 5%, which we consider a more sustainable run rate. Signing bonuses were also lower and we anticipate about a $40 million total for this year. The significant capital expenditures that MoneyGram has incurred over the last two years has funded the development of the differentiated products that Alex was describing. Capital investments have also enabled us to set a new standard for global compliance engine. All of this has laid the groundwork for future growth in a world where compliance and the use of technology are only going to increase in importance over time. Overall, we continue to see healthy growth in volume, revenues, and profitability in the majority of our markets around the world, while also experiencing a disproportional effect from these economically impacted markets that we've been discussing. The new pricing changes will also continue to adversely impact our revenue growth. However, even though these are challenges of revenue growth, we believe that they will not materially impact earnings and EBITDA in the fourth quarter. We are addressing our cost structure and we are also focused on efficiencies and geographic diversification to mitigate the impact of these headwinds. And now, I'll turn it back over to Alex.

[Alexander Holmes:]

Great. Thanks Larry. We're very proud of all the progress that's taken place in 2016 to position us for strong future growth. Our financial results are beginning to reflect our focus on margin expansion and profitability, along with free cash flow generation. From a product perspective, we are delivering innovative, reliable and relevant digital solutions that demonstrate MoneyGram's commitment to being the financial technology company that best understands and satisfies our money transfer customers. This was only made possible by the powerful combination of our transformative digital offerings, our global cash-based network, and our great employees all around the world. Thank you as always for your interest in MoneyGram and now we'll turn it over to the operator to open it up for Q&A.

[Operator:]

[Operator Instructions] We'll take our first question from Bob Napoli with William Blair.

[Robert Napoli:]

The Walmart deal that you announced, you said that the bands that went to Euronet or to Ria represents about 1% of your revenue, but are there more impacts beyond that? With your pricing coming down for the Walmart to Mexico, for the Walmart2Walmart, is that going to force pricing down for the non-Walmart2Walmart? What other effects do you see from those changes that are being made, the deal you won and the deal you lost, as we look at 2017? I mean it's nice that 2016 doesn't change, but obviously more focused on 2017 at this point.

[Alexander Holmes:]

A couple of things. So first of all, Walmart launched their U.S.-to-U.S. product and had it limited at $900 for a couple of years. They notified us they intended to extend that product up to $2,500 adding a new band to that, and we in discussions with them decided to also lower our prices to make sure that we maintained a relevant price point for customers coming to Walmart. We didn't lose a deal. They extended a product that they have and we continue to offer domestic transfers over $900 and we continue to offer domestic transfers over $2,500 inside of Walmart, and we continue to offer domestic transfers inside Walmart from $0 to as much as you really want to send. So, we continue to be inside Walmart and we're proud of that relationship and that partnership we have. We understand their decision to extend their product. They are obviously looking at optionality in how they can provide service in the way that they want, but we had an opportunity to have discussions with them, to work with Walmart Mexico and Walmart to see if we could bring something really truly unique to the market, and we were able to do that launching our Walmart2Walmart Mex powered by MoneyGram. And we're really excited about that because we think obviously U.S. to Mexico is a huge corridor. A lot of the business flows through smaller mom-and-pop retail networks, which is a big opportunity for us to capture a lot of market share from that retail network and bring that kind of into the Walmart house, if you will, using MoneyGram service. And so, I think it's kind of a testament to the relationship that we have on both ends and the fact that we are able to pull that together. And we're obviously able to do that in a way that was not impactful to margin, so that we could offer a lower price to the customer. So I anticipate very positive things, and I think if you talk to Walmart about it, they are extremely excited about the potential for that product and all of the volume that it could potentially drive into the stores. I think as you look at our business and our position in 2017, I think it's a little early to tell. These products just launched in the last couple of weeks. We're seeing very good growth in the Walmart to Mexico product. So its potential is quite large. Obviously, in the upper bands, in the U.S.-to-U.S. business, certainly the price cuts there, it takes more volume in lower-priced transactions to offset price reductions in the upper bands. But we do a heck of a lot more transactions to Mexico, do a heck of a lot more transactions in the lower bands than we do in the upper bands. So, we feel good about the position, and I guess what I would say about 2017 at this point is, it's a little early to tell. Certainly when you make price changes, there's always some headwinds associated with that until you kind of grow through those changes and get the volume where you want it to be. But no, I mean I'm not – I think our 2016 statement stands and we're not really anticipating anything negative for 2017 at this point.

[Robert Napoli:]

And then just on the cash flow, obviously really good cash flow this year, but I think some of the agency signings are probably on a low point. What would you think about free cash flow? You gave the CapEx, thoughts on CapEx, I appreciate that. What would be a reasonable way to think about agency signings as kind of a normal run rate over the next few years?

[Alexander Holmes:]

I'll let Larry jump in here, but what I would say is that when we have, and we said this at the time the signing bonuses were on the rise, we were renewing I think driving at the time, nine of our top 10 agents had gone through big renewals. Some of those got extended for longer periods of time than historical contracts would reflect. And so the signing bonuses went up, and we think that was the right financial decision to make at the time to secure those contracts and ensure that we have good solid business growth for years to come. The rest of the market outside of some of these bigger legacy contracts hasn't really been as dependent on signing bonuses as in years past. And so, we're seeing some lightening of that. I think our run rate will return to kind of normal historical norms, notwithstanding of course the one-off opportunities here and there to sign a really big agent that unfortunately from time to time still requires a signing bonus. I don't know if you'd add anything, Larry.

[Larry Angelilli:]

The only thing I would add is that still for next year I think we're not expecting any kind of significant change to this year's run rate because the big ones are basically all done.

[Alexander Holmes:]

I think as you look at, I mean as I look at cash flow, Bob, I think there's a couple of different ways to look at it. I mean there's the cash flow generated from the business and there's obviously the opposite side which is how much cash kind of are you spending and allocating back into the business. And I think when you look at signing bonuses, would get right amortized through the commission expense line, so I think that's fully reflected in the numbers. And then when you look at CapEx, there's a question around, what's your maintenance CapEx and what's your investment in R&D, and I think that's probably where we've had a big surge in CapEx for some new products. We've had a big surge for a lot of the compliance changes and some back-office IT structural changes, and those are dissipating a bit. We intend to keep our foot on the accelerator on our investments in R&D and we'll try to do a better job on a go-forward basis, talking to you about the payback for those. So, you're thinking in terms of value-add versus just CapEx to upgrade or keep the lights on kind of stuff. So we'll separate that out kind of on a go-forward basis and talk more distinctly about it. But we feel good about our cash flow position, and if the business continues to perform well on the bottom line, now as you said, we focus a lot on profitability, driving efficiencies, getting global scale, I think that's showing in the results and we're excited about it.

[Robert Napoli:]

Great. Just real quick, tax rate for 2017, you guys have done a lot of work on the tax rate, I guess this quarter was just a one-off benefit, but do you have a handle on your tax rate for 2017 and long-term?

[Larry Angelilli:]

Yes, I think we're on schedule. It's kind of the same story that we talked about last quarter, but I'm glad you picked up and we didn't want to communicate that this quarter's tax rate was indicative of any significant change, but we're on schedule to have a ramp down on our tax rate for next year.

[Robert Napoli:]

Okay, thank you.

[Alexander Holmes:]

So, I mean I think what I would say at this point, we'll give you some more detail soon, but as you are modeling it out, we've continued to have kind of that 40%-ish tax rate I think over the course of 2017, that should drop into the upper 20s. So I think that's probably the best guidance we can give you for now and we'll kind of give more color as we get the specifics ironed out here in the next 90 to 120 days.

[Robert Napoli:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Our next question will come from Danyal Hussain with Morgan Stanley.

[Danyal Hussain:]

Sorry, just to clarify the tax question, Alex, it sounded like you said upper 20s. Did you mean upper 30s or did you mean upper 20s?

[Alexander Holmes:]

No, actually the structure that we're going to be putting in place is going to enable us to move the tax rate down. I'm not going to get overly detailed on it because we're not exactly sure exactly day by day how it's going to play out, but I think moving the tax rate from the 40s to upper 20s, low 30s over the course of next year is probably a good place to start.

[Danyal Hussain:]

Okay, that's fair. So just on the deceleration both in U.S.-to-U.S. sub $200 and in the Mid East, you started to give some color, Alex, but does it sound like you've seen the trough or is there still some degradation in either of those corridors heading into the fourth quarter?

[Alexander Holmes:]

There's a few things going on. I mean I would say, when you look at for example Saudi Arabia as reported by the central bank in Saudi, from January through July of 2016 remittances have dropped 13%. Expat remittances are down about 5%. Local Saudi remittances are down I think 27%. So, we continue to work with our partners over there to try to reposition the business and see what we can do, but clearly with the slowing of investments and projects, it's a market to keep our eye on. The other thing going on in Saudi now, there was a proposal to actually tax anybody making over 3,000 riyals I think a month and put a 10% tax on that. So, clearly the kingdom is undergoing some change. It's a big economic shakeup. They have a lot of work going on there to stabilize their economy with the low oil prices. And assuming those don't pop anytime soon, I think we're going to continue to see some volatility in that market. When I kind of swing to places like Libya, it's a little bit different and sort of similar to Angola, but we're seeing big declines in international reserves, increases in inflation rates, GDP slowing down, and they are dealing with kind of a drop in export earnings, government receipts, and then sort of oil price is also pressuring GDP. So again, these are strong growth markets with outbound sends with huge potential, but when you're having sort of currency crunches and inflation challenges, it's a problem. Angola is really kind of just a very sad story. It's kind of a mess right now. Basically at the end of the day, it's sort of like Libya, but given everything that's happened with oil exports really drying up or them, GDP slowing down, debt increasing, there is really a big foreign currency crunch and they have a lot of concerns about outbound sends. Just a couple of anecdotal items here, the Chinese community, which was a big investor in Angola and sending a lot of money home, has dropped 93% from about 300,000 expats down to around 20,000. Vietnamese, which was another one, has dropped from somewhere 100,000 down to 10,000. So, very difficult to drive an outbound remittance business when it's kind of dried up. And then when you get to back home in the U.S.-to-U.S., I think there's a – so those are kind of the big headwinds, and then when you get to the U.S.-to-U.S., obviously we're seeing some stabilization in our business on what I would say kind of the $0 to $900 business, something we talked about, the volume had sort of stabilized. Growth rates still don't look great, but just in terms of total transactions and volume processed, it was definitely stabilizing as we went through the third quarter, very similar to the second quarter. So, that was really good to see. Obviously, the new changes to the upper bands puts a new wrinkle and an additional twist on it. So, I think that the U.S.-to-U.S. is going to kind of continue to play out the way we've seen it play out over the last couple of quarters. Our focus continues to be on outside of the U.S. on the emerging markets, and again, it's frustrating because we've got three or four kind of large markets that are really impacting our business, but when you bifurcate that and look at all the amazing growth we have in Latin America, the U.S. Outbound business continues to do well, we're doing really, really well in Asia, new corridors kind of growing and popping up all the time, new agent adds that we're doing, some really exciting things, so it's kind of getting masked I think by these larger markets which really are kind of facing some unique challenges that are all their own. But broadly speaking, we feel very good about that and our focus continues to also be on bottom line performance and ensuring that we're driving profitability throughout this entire process.

[Danyal Hussain:]

Got it. Thanks. And then just to clarify Bob's earlier question, but the 1% revenue exposure is just Walmart2Walmart, right, and so did you provide a number for ex-Walmart $900 to $2,500?

[Alexander Holmes:]

So that's, I'm sorry, the 1% is all U.S.-to-U.S. over $900.

[Danyal Hussain:]

Okay, great. Thank you very much.

[Operator:]

We will take our next question from Josh Elving with Feltl and Company.

[Josh Elving:]

I wanted to just touch base on kind of the compliance environment. You had a certain element of required spend on technology throughout the balance of this year. Can you kind of give us an outlook on what the expectation is for the full year, how much you have kind of I guess maybe completed to date, and then what's your expectation for compliance-related spend in 2017? And I know you have to monitor in-house throughout all of next year, but in addition to that?

[Alexander Holmes:]

Good question and certainly very relevant. We're making some significant progress on our compliance program, and as always, I think it's important to recognize the hard work internally by all the employees. As we have changed our systems and added new functionality, one of the things I've talked about a little bit over the last couple of years has been sort of the tuning of the system, and when you put new things in, I think they tend to hit a little bit harder than intended as we tune them and then try to get the pieces right. We actually just put in some new changes to a lot of our global compliance screening technology just a few weeks ago, which has had a fantastic impact on our business and is really kind of freeing up more transactions than we had before and really isolating the variables down to those transactions that are more risk and of more concern to us. So we are very excited about that. Our fraud losses have dropped tremendously internally, and that's not online risk management fraud but this is consumer scam fraud which is obviously something that we fight hard against and is a big concern to state and federal government agencies who are looking at ensuring that money transfer companies are reducing fraud at an accelerated rate and protecting consumers in more dynamic ways. So, we're very pleased with all those changes that we've made. We have quite a few more changes to come as we roll out new system functionality later this fall and then into the spring of next year. We have reached a point with the monitor where they've begun kind of looking at what we have implemented. They are doing some testing of certain systems and checking things off the list. So, I think we're making good progress there. Exact dollar spend next year, I don't really have it completely locked down, but I would say it's probably going to be approximately in the $15 million range. The monitor expense will continue through next year, and we're very hopeful that we'll get all of our changes put-in in a timely way and we'll be able to test those and get the opportunity to kind of move along, but there's a lot to do between here and there. But what's fantastic about it is that I think all the hard work is being recognized by governments around the world, by local state regulators, et cetera, and we're having great conversations with banks, and certainly in an environment of tough bank derisking where there's expectations of 'know your customer' and who you're doing business with, the systems for creating the way that we're processing transactions, the transparency that we're creating in our business, I think is going to lead the way. And so, we're very excited about how that is all going to continue to function on a go-forward basis, and I think it will put us in a very unique position when we have new things coming like AML Directive 4 in Europe, when we have new things like [TSB 2] [ph] coming, we are going to be very well-positioned to address those, which I think will be hopefully a competitive advantage for us as we move into the next cycle here.

[Josh Elving:]

Okay, great. Thanks for the color on that. So when I think about the free cash flow, your adjusted free cash flow metric, obviously those numbers are running well ahead of what you kind of guided to or thought about at the beginning of this year. As we head into 2017, how much of that adjusted free cash flow turns into free, free cash flow and can you maintain or grow this kind of level which appears to be potentially approaching $90 million or more in 2016?

[Larry Angelilli:]

I think that the trend that you see, where the difference between adjusted and unadjusted keeps narrowing, is going to be your indication that our earnings are going to be cash-based earnings. So we're expecting that this trend will continue, and that's really part of the quality of earnings story, is that we are, our net income, our operating income is primarily cash-based and you'll start to see an ever-increasing correlation between that and our cash flow.

[Josh Elving:]

Okay. And then just one more detail question, with regards to the agent signing bonuses, I think you guided to or suggested around $40 million in 2016 and that it could be similar to that in 2017. Would you consider that a normalized rate? I guess I would under the impression that the normalized rate was perhaps in the $60 million.

[Alexander Holmes:]

Good question. I think normalized depends on the cycle that we're in, and I think historically we sort of have been trending in kind of that $30 million to $40 million range. We had a big acceleration over a couple of year period as we renewed nine of our top 10 agents for long-term contracts. Now, it's kind of back down. So, I would say, yes, normalized is probably more in that $35 million to $50 million kind of range, but from time to time it will spike as we go through some renewals, which sometimes are done early and not as necessarily predictable as we may have imagined. But yes, I mean we'll provide more color on that, but I would think if you're plugging kind of a $40 million-ish number now for next year, that's probably a good place to start. We have some – signing bonuses will be a little higher in the fourth quarter as we already have some things committed, obviously higher than they've been throughout the year to get us to our year-end number here, but nothing that's going to push us materially higher.

[Josh Elving:]

Great. Thank you very much.

[Operator:]

We will take our next question from Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

I wanted to ask you, you talked about for the markets where you're seeing maybe not the growth you wanted to see, and I'm wondering the impact on margins from those markets. As you look at Angola and Saudi Arabia and maybe a couple of the other markets, are the margins in those markets higher, lower, or about the same? So what would you expect the impact from those four markets to be on margins?

[Alexander Holmes:]

It's actually an interesting mixed bag, and Saudi Arabia is a low RPT business that tends to have pretty high volume associated with it. So in total, you end up with a lot of revenue, but you sort of get there in a different way I'd say. In contrast, a country like Nigeria has extremely high RPTs on the sends. They send a lot higher dollar volume on kind of a per transaction basis. So, the net of that is always an interesting mix. I would say that right now we're looking at kind of a net neutral on the margin, which is good, and we continue to offset that through some other decisions. Globally around the world, we're really looking at and going through a process that we refer to internally as kind of agent [caring] [ph], and we're looking at all the distribution that we have around the world, how consumers are interacting with us, and whether or not those particular locations or corridors happen to be in the profitability range that we want them to be, and we're making some good trade-offs there and doing some things to either reposition or switch out agents or change commission. So the net of that is, when you have a global portfolio, you are kind of able to manage your way through it. Again, I think the biggest issue that we are facing right now is just compressed growth rates on the revenue on the top line, but when I look at the fall through and the profitability, we're in good shape.

[Kartik Mehta:]

And then what about on the pricing front? It looks like this quarter pricing was a positive. I'm wondering your outlook for 2016, 2017, where pricing stands, and maybe if the fundamentals are changing?

[Alexander Holmes:]

It's always a good question, and again with the dynamics of the markets, there's a lot to parse through in terms of how that comes out. But I would say that we are trying to be as opportunistic as we can to maximize returns, and so we have had some opportunities in a number of places to put price increases in, and sometimes those are just very small, subtle changes, but it can make a big difference over the course of a quarter or over the course of a year. Pricing generally I would say has been relatively neutral. We haven't really seen a lot of what I would quote from last year's sort of disruption in the market. I think the great expansion that we saw in some of the digital players has slowed quite a bit. I think that the on-the-ground competition has been struggling and challenged with what's happening in kind of the bank derisking space and a lot of the compliance front. So, when you look through that, I think that prices, you always have to be competitive and I think we continue to adjust. We do have places where we have taken prices down to remain competitive. But the net of it is that it's been a good 18 months and I think that trend will continue.

[Kartik Mehta:]

Thanks, Alex. I appreciate it.

[Operator:]

We will take our next question from David Chu with Bank of America.

[David Chu:]

Sorry if I missed this, but can you give us transaction volume across the reported geographies, so U.S. Outbound, non-U.S. and U.S.-to-U.S. please?

[Larry Angelilli:]

I think it's on the slides. I'm not sure that we put it into the script on this call.

[David Chu:]

I don't see it on the slides. So do you guys have it?

[Larry Angelilli:]

We'll see if someone can flip through the slides. That's not here I guess. If not, we'll get those to you in the follow-up call.

[David Chu:]

Sounds good. And also not sure if you answered Bob's question earlier, so are you planning to lower pricing for non-Walmart transactions to Mexico?

[Alexander Holmes:]

For non-Walmart prices to Mexico, are we planning to lower prices? No.

[David Chu:]

No, okay.

[Alexander Holmes:]

No. I mean I think the Mexico market, the U.S. to Mexico market specifically, is obviously very competitive and competitors approach it in a number of different ways, low fees-high FX, higher fees-lower FX, et cetera. So I think this product is unique. One of the things that we've talked a lot about in the past is that Walmart does nice sends to Mexico, but it's by far not the largest sender, and Walmart Mexico is a great receiver but not the largest by far. And so, I think this product is unique. It allows that interaction between the Walmart network to really focus on how it can maximize sends and receives on both sides, and we are expecting to improve the category and we're expecting to capture some share from the broader markets. And when you look at that, to tell you I don't know that that's necessarily going to require others to adjust their prices as much as I think they're going to have to focus on differentiation and service quality as they kind of go forward. So, no, I don't really anticipate needing to change prices anywhere else. I think the U.S.-Mexico corridor is very competitive and we feel good about it.

[David Chu:]

Okay, great. And lastly, so what percent of your transactions is U.S. to Mexico today?

[Alexander Holmes:]

It's right around 10%.

[David Chu:]

And how does that break down between Walmart and non-Walmart?

[Alexander Holmes:]

I'm not going to break that out for you, but as I think we've indicated a few times, Walmart does nice business to Mexico but it's by far not our largest.

[David Chu:]

Got you. Thank you very much.

[Operator:]

Our next question will come from James Schneider with Goldman Sachs.

[James Schneider:]

I was wondering if you could maybe just kind of, I want to make sure that I understand the U.S.-to-U.S. revenue growth commentary, are we going to see further pressure throughout 2017 on that U.S.-to-U.S. growth rate or do you think at some point throughout 2017 the volume improvement can offset the pricing?

[Alexander Holmes:]

I think we'll continue to see stabilization in the transaction side. I think the revenue is going to be a little trickier, just given sort of the size of the RPT associated with those upper band transactions. So I think it's a little early to say. We'll see what the impact of the price changes are and then the fact that the U.S.-to-U.S. private label was expanded. So, I think that we need to do some netting here and get into that, but when we look at what had been the competitive dynamic before of the $0 to $900, that had been stabilizing for us and the growth rates, just from a comp basis, didn't look particularly strong, but we were doing about the same amount of volume over the last couple of quarters. So, from a transaction basis, I think we'll continue to see some stabilization there, but revenue probably will be a headwind next year, just to what extent I'm not overly positive.

[Larry Angelilli:]

I think the question will be whether the lower prices attract new business and whether we start to gain share from that, and I think that's something that is a definite possibility or it could expand the category. So that's a dynamic, it's just too early to tell.

[James Schneider:]

That's helpful. Thank you. And then maybe as a follow up, Europe continues to kind of outpace on the growth side, can you maybe talk about what are the specific countries that are driving that growth right now, and whether you are investing in some additional countries heading into 2017 that is going to be able to kind of sustain that growth and where those are?

[Alexander Holmes:]

You did say Europe, correct?

[James Schneider:]

Yes.

[Alexander Holmes:]

Okay, good. I think it's actually great to see. It's actually some of our bellwethers that had struggled for a while, places like Spain and Italy that had been historically challenging markets for us or actually doing – not historically, but historically have been big markets for us that had slowed down over a couple of years, are actually doing very, very well. It was interesting, I was in Morocco and Spain just a few weeks ago and it's amazing to see Spain to Morocco actually surging again as a corridor. I mean that was something that was huge probably 10 to 15 years ago and slowed down substantially, and all of a sudden that market is resurging. We're actually seeing good growth in Morocco on sort of receive/send basis as well. So, there's interesting things going on. I think we've seen continued strength in places like the U.K. and France and in Germany, and then Eastern Europe continues to perform very, very well for us as those economies have changed and evolved over the years. So, a lot going on. I think the teams over there are doing an incredibly good job in terms of continuing to position the business. We have a couple of places where we have some owned stores, which is always a different sort of management cycle and then a competition in the large chains and on the retail side, and when you kind of come out in sort of those three categories along with some dot-com business, it gives us some opportunity to approach the markets differently, and I think right now we're performing quite well.

[James Schneider:]

Thank you.

[Operator:]

Our next question will come from Mike Grondahl with Northland Securities.

[Mike Grondahl:]

Two questions. One, I think you said commission expense as a percentage was down a little bit this year from last year. Anything going on there that is going to kind of continue to benefit you guys or is that just a little bit more sort of lumpy? And then secondly, your two sort of major expense lines, comp and benefit, and transaction and operation support, how do you see those trending over the next year or two?

[Alexander Holmes:]

You want to take the first one?

[Larry Angelilli:]

The first one, just on commission, so it's kind of a combination, I think it can be lumpy and that's one of the things we always caution people about is, mix can change that, sometimes holidays can change that depending on markets. But one of the things that Alex mentioned was the way we're looking at agents, and we're tending to focus more on agent productivity and we are focused on where the opportunities are and improving our gross margin. So, we're focused on commissions, we're focused on agent profitability and we think that there is a little more room there to improve that, but I don't think it's a straight line. And then you will see some seasonal changes just based on where the volume is coming from.

[Alexander Holmes:]

And I think on the comp and bene and T&O lines, we have a lot of initiatives going over there across those for gaining efficiencies and controlling costs, but controlling costs in a way that's positive for the business, from ensuring that we're maximizing investments and getting the right return on that and getting as much scale out of it as we can. So, I would anticipate those to continue to be relatively low growth into the future.

[Mike Grondahl:]

Got it. Low growth, okay. And then maybe just a quick follow-up, the $10 million of debt prepayment, nice, is that something you want to kind of start to do quarterly or would you consider that a one-off what you did, any thoughts there?

[Alexander Holmes:]

I definitely would like to do more in the debt paydown. I think as Larry talked about, we were kind of up to 3.95x, we're down to 3.45x, and that we should end the year I would guess around, after this payment, around $925 million outstanding. I'd love to push it down below 3x and continue to show or put the cash flow to utilization on the debt side. So, it will be lumpy. I'm not going to forecast right now that we're going to do a payment every quarter, but I think as we see that opportunity, we'll be opportunistic and look at the debt from a different perspective. I think it's also important to remember, our term loan is covenant light. We do have an undrawn revolver that does have some covenants on it, but we don't have any sort of leverage issues associated with it. But I do think from a leverage perspective, from a debt paydown, from an EPS, I mean all those things are positive. So, we'd like to put the cash to work.

[Mike Grondahl:]

Got it. I appreciate that. Thank you.

[Operator:]

Our next question will come from Puneet Jain with J.P. Morgan.

[Puneet Jain:]

So how do economics on the Walmart2Walmert transactions to Mexico compare with other transactions? So I'm assuming you will continue to incur processing compliance expense, but marketing and commission expense could be lower. So could you comment on economics on those transactions?

[Alexander Holmes:]

Yes, we went into it with the anticipation that it would be margin neutral. So, we're so far, so good.

[Puneet Jain:]

That's good to know. And Alex, from what you might have seen in the past, you think there is a risk that low prices on high band U.S.-to-U.S. transactions could hurt low value transactions as customers try to…?

[Alexander Holmes:]

Historically, it has been different people sending for different needs in the U.S.-to-U.S. market. I think one of the things we've talked about in the past is it's kind of a funny market. It really is a lot of one-and-done type transactions. It just happens that people have a lot of one-and-done type of needs. When you get into the larger dollar sends, it tends to be more deliberate rather than kind of one-off, and I don't mean that in sort of a recurring sense, I just mean it in terms of, if you're going to send $2,000, you are usually doing that because you have the need for a larger payment, versus when you're kind of in the $50 to $100, you may be sending money to a friend or a family member because they need something at an immediate sort of point in time, versus more of a larger-dollar payment which is done to satisfy a payment or money due or maybe to get, sometimes it's money into the hands of a worker who is in a remote location, and that type of thing. So, I don't really know at the end of the day that there is potential to drive those up. I think in other markets where we've seen price changes, it typically doesn't affect the amount of money that people send.

[Puneet Jain:]

Got it. Thank you.

[Operator:]

It appears there are no further questions at this time. I'd like to turn the conference back to Alex for any additional or closing remarks.

[Alexander Holmes:]

As always, we appreciate your time and we are continuing to drive the business in a way to ensure long-term growth and profitability. So as always, thank you for your interest and we look forward to talking to everybody in the coming weeks.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.